UK Pestel

Country Profile Series
United Kingdom
In-depth PESTLE insights
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PUBLICATION DATE: May 2012
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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 UKs 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 for
concern
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 on
the 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 governments 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 200414, 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
Journals 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 200812.
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
GDP, constant prices ($bn)

GDP growth rate (%)
2009
2010
2011
2012f
2013f
2014f
2015f
1,668.2
1,703.2
1,716.8
1,727.3
1,750.0
1,791.2
1,834.7
-4.6
2.1
0.8
0.6
1.3
2.4
2.4
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
7.6
7.9
8.1
8.3
8.4
8.0
7.7
130.6
130.6
132.9
134.6
136.0
137.1
137.9
GDP, constant 2000 prices, per capita ($)
Unemployment rate (%)

Mobile penetration per 100 people
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TABLE OF CONTENTS
Overview
Catalyst
Summary
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
42
Performance
44
Monetary situation
51
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Outlook
53
Social Landscape
55
Summary
55
Evolution
55
55
Performance
59
Outlook
59
Technological Landscape
61
Summary
61
Evolution
61
61
Performance
62
Outlook
65
Legal Landscape
66
Summary
66
Evolution
66
66
Performance
69
Outlook
69
Environmental Landscape
71
Summary
71
Evolution
71
71
Performance
72
Outlook
75
Appendix
77
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Ask the analyst
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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, 19912011
42
Figure 6:
GDP and GDP growth rate, 200515
45
Figure 7:
Sector-specific contribution to GDP, 2011
46
Figure 8:
Agricultural output (bn), 200611
47
Figure 9:
Industrial output (bn), 200611
48
Figure 10:
Services sector output (bn), 200611
49
Figure 11:
The UK's external trade position, 200711
50
Figure 12:
Consumer price index and consumer price index-based inflation, 200515
52
Figure 13:
Unemployment in the UK, 200515
53
Figure 14:
Major religions in the UK, 2001
56
Figure 15:
Carbon dioxide emissions (million metric tonnes) and growth (%), 200510
74
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TABLE OF TABLES
Table 1:
The UK key fundamentals
Table 2:
The UK key facts
11
Table 3:
Analysis of the UKs political landscape
14
Table 4:
Analysis of the UKs economy
17
Table 5:
Analysis of the UKs social system
20
Table 6:
Analysis of the UKs technology landscape
23
Table 7:
Analysis of the UKs legal landscape
26
Table 8:
Analysis of the UKs environmental landscape
29
Table 9:
Comparative performance on receipt of patents, 200311
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

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%), and

unspecified (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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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
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 UKs 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 governments 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 of
around 538 million metric tonnes in 2010.
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PESTLE Analysis
Political analysis
Overview
The UKs 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 (SNPs) victory in local elections in Scotland
is likely to result in a referendum on Scottish independence in 2014.
Table 3:
Analysis of the UKs political landscape
Current strengths
Current challenges
Strong democratic setup and effective governance
Tensions in the ruling coalition and falling popularity of the

government
Strong position in global politics

Future prospects
Future risks
NHS reforms
Terrorism
Stronger ties with emerging economies
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 countrys political might is backed
by its firm establishment as a global business hub and economic power.
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PESTLE Analysis
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
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
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 UKs economy
Current strengths
Current challenges
Highly developed economy and favorable investment climate
Rising government debt
Excellent infrastructure for conducting business
Budget deficit
Highly competitive economy
Future prospects
Future risks
Corporate tax reduction
Recessionary phase may continue
Eased inflationary pressure
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
requirements, are expected to enhance the competitiveness of the UK economy.
Excellent infrastructure for conducting business
The importance of transportation infrastructure in the UKs 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 countrys 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 UKs strength lies in knowledge economy sectors
such as software and pharmaceuticals. According to the World Economic Forums 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 200708 pushed the overall fiscal deficit to 11.74% of GDP in 200910, 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 201516. Progress was made in 201011, 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 201617 and a supplementary target that requires public sector net debt as a percentage of GDP to fall by
201516. 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
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 their
companies 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 slim, 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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PESTLE Analysis
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 UKs social system
Current strengths
Current challenges
High standard of living
Income inequality and child poverty
Education system
Relatively high dependency ratio
Healthcare services
Future prospects
Future risks
System of "managed migration"
Challenges of an aging population
Measures to increase simplicity and transparency
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 nations tradition of education dates back hundreds of years and is constantly evolving.
The UKs qualifications are both recognized and respected throughout the world. The UK has around 170 universities
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PESTLE Analysis
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 not
been 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 lived 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 014 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 governments 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 UKs 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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PESTLE Analysis
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 201011 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 UKs
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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PESTLE Analysis
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 UKs 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 UKs technology landscape
Current strengths
Current challenges
Renowned scientific expertise
Lack of skilled personnel
Effective intellectual property rights
Regulatory control over indigenous innovations
Future prospects
Future risks
Scope for new industries
Declining patent applications by residents
Outsourced R&D can improve focus on core areas
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 UKs
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 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.
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 for
public-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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PESTLE Analysis
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 UKs legal landscape
Current strengths
Current challenges
Legislation conducive to business
Increase in VAT
Effective enforcement of legislation
Tax evasion
Finding balance between traditional liberties and increased terror
threat
Future prospects
Future risks
Tax reforms
Lack of incentives to attract FDI
Other reforms on CFCs and enterprise management incentive

schemes
UK regulation not in sync with EU
Judicial reforms
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 8090% of stores, had predicted that a VAT rise from 17.5% to
20% would cut consumer spending by 3.6bn during 201114. 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 not
harm 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 the
general 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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PESTLE Analysis
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 individuals 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 UKs 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 UKs 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 UKs 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 UKs businesses suffer from high regulatory compliance costs. The government has to take
measures to bring the countrys laws in sync with EU regulations.
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PESTLE Analysis
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 UKs environmental landscape
Current strengths
Current challenges
Strong global influence
High air pollution
Good track record in implementing policies
Future prospects
Future risks
Proactive policy toward Kyoto Protocol successor
Balancing environmental protection with economic development
Carbon budget
Collaboration with US and other countries on clean technology
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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PESTLE Analysis
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 still limited to large point sources of pollution. In
December 2010, the directive on industrial emissions was published in the official journal and will be enforceable into the
countrys 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 countrys 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 to
boost 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 continents 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 countries
participated 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 UKs 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
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 economic
development. 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 earths 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 UKs colonies gained independence.
195090
In 1961, the UKs 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 by
Argentina, 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.
19912011
In 1991, the UK, as one of the USs 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 devolved
system 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. Blairs party was
subsequently re-elected twice, in 2001 and again in 2005, despite the partys 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 UKs 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 EUs 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
191450
1951 80
World War I began in

1914.
198190
Queen Elizabeth II was

crowned as queen in
1953.
War ended in 1918

with several hundred
thousand UK soldiers
dead.
The UK intervened in
Suez Canal crisis, but
withdrew due to US
pressure in 1956.
First Labour
government was
elected in 1924.
The UKs bid to join the

EEC was vetoed by
French President
Charles de Gaulle in
1961.
Major worldwide
economic crisis was
witnessed in 1931.
World War II started
in 1939.
The UK joined the EEC

in 1973.
War ended in 1945

and a welf are state
was introduced by the
newly elected Labour
government.
EEC membership was

endorsed in a
referendum in 1975.
19912000
In 1981, the Thatcher

government began the
process of privatization
of state-run industries.
In 1982, Argentina
invaded the Falkland
Islands in the South
Atlantic, which was
recaptured by the UK.
Thatcher was re-elected
in 1983 in the midst of
high unemployment and
unrest in the inner cities.
Thatcher resigned af ter
she lost the leadership
of her party and she was
succeeded by John
Major in 1990.
The UK became a
permanent member of
the UN Security
Council in 1945.
The UK became a
founder member of
NATO in 1949.
2001 Onwards
In 1991, the UK took

part in US-led military
campaign to liberate
Kuwait from Iraqi
occupation.
Major was re-elected
as prime minister in
1992.
The UKs government
along with the Irish
government issued the
Downing Street
declaration on Northern
Ireland in 1993.
The Labour Party led
by Tony Blair won a
landslide victory in
1997.
The voters of the
Republic of Ireland and
Northern Ireland
approved the Good
Friday Agreement for a
political settlement in
1998.
In 1999, the Scottish
parliament and Welsh
assembly were
inaugurated.
The Labour Party led by

Tony Blair won its second
successive election in
2001.
The UK joined US-led
military campaign against
Iraq in 2003.
The Labour Party won a
third successive term in
off ice in 2005.
Gordon Brown succeeded
Tony Blair as the prime
minister in 2007.
In May 2010, the
Conservative Party won
the House of Commons
elections with 36.1% of
the vote and f ormed a
coalition government
along with the Liberal
Democrats. David
Cameron became the
prime minister.
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Key political figures in the UK are:
Prime minister David Cameron
Head of state Queen Elizabeth II.
Figure 3:

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 the
right 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
since 2001.
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 UKs 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 political 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 UKs 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 individuals 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.
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:
Others
4%
Liberal Democrats
9%
Conservatives
47%
Labour
40%
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Key policies
Economic
The governments 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 to
bring 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 UKs 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 in
Libya 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 19962010. 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 possible
rank.
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 credibility of the government's commitment to such policies. The UKs
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 this
category, 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 likelihood 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 it 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
ECONOMIC LANDSCAPE
Summary
The UKs 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
countrys GDP and thus significant cause for concern. The government maintained that it will go ahead with austerity
measures 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 challenged
for 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 countrys GDP
contracted by 1.1% and 4.5% in 2008 and 2009 respectively. The countrys 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, 19912011
4
3
2
Growth rate (%)
1
0
1991
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
-1
-2
-3
-4
-5
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 FSAs 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 governments 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 governments 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 sectors 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 UKs 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 exchanges
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 201015, 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 financial
institutions 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 license 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, 200515
1,850.0
4.0
3.0
1,800.0
1,750.0
1.0
0.0
1,700.0
-1.0
1,650.0
-2.0
Growth rate (%)
$ billion
2.0
-3.0
1,600.0
-4.0
1,550.0
-5.0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
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 sectors 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
countrys food requirements. However, the increasing dominance of the services sector and the traditional strength of the
UKs industrial sector mean that the agricultural sector contributed just 0.7% to GDP in 2011.
As a result of the UKs 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 200611.
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Figure 8:
Agricultural output (bn), 200611
12.0
20.0
15.0
10.0
10.0
GBPbn
5.0
6.0
0.0
4.0
Growth rate (%)
8.0
-5.0
2.0
-10.0
-15.0
0.0
2006
2007
2008
2009
2010
2011
Year
Agriculture output
Growth rate
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 part
of 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 200611.
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Figure 9:
Industrial output (bn), 200611
300.0
10.0
8.0
290.0
6.0
4.0
2.0
270.0
0.0
260.0
-2.0
Growth rate (%)
GBPbn
280.0
-4.0
250.0
-6.0
240.0
-8.0
-10.0
230.0
2006
2007
2008
2009
2010
2011
Year
Industry output
Growth rate
Services
The UKs 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 worlds 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 sectors 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
200611.
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Figure 10: Services sector output (bn), 200611
1,050.0
6.00
5.00
1,000.0
4.00
GBPbn
3.00
900.0
2.00
850.0
Growth rate (%)
950.0
1.00
800.0
0.00
750.0
-1.00
2006
2007
2008
2009
2010
2011
Year
Services 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 governments 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 UKs budget deficit fell from almost $240.8bn in 2009 to just below $227.7bn during 201011 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 201011. Although the fiscal deficit fell in 2010, it was still higher than the 3.0% stipulated by the
European Monetary Unions 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 UKs 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 UKs total exports), Germany (13%), France (9%), the Netherlands (9%), Ireland (7%), Belgium
(6%), Italy (4.0%), and Spain (4%).
The UKs 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, 200711

1,800.0
1,569.6
1,541.8
1,600.0
1,221.5
$ bn
1,200.0
1,000.0
800.0
1,367.4
1,345.8
1,400.0
827.7
819.1
713.9
722.7
720.1
640.4
741.9
600.0
647.3
631.9
581.1
400.0
200.0
0.0
2007
2008
2009
2010
2011
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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Economic Landscape
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 UKs 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 EUs leading
destination for inward investment. According to the United Nations Conference on Trade and Development Investment
Report 2011, the UKs 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 & Poors, 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, 200515
160.00
5.00
4.50
4.00
120.00
3.50
100.00
3.00
2.50
80.00
2.00
60.00
Inflation (%)
Consumer price index
140.00
1.50
40.00
1.00
20.00
0.50
0.00
0.00
2005 2006 2007 2008 2009 2010 2011
2012 2013 2014 2015
Year
Consumer price index
Inflation
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 UKs 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 worlds 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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Economic Landscape
MarketLine forecasts, it is expected to be around 8.3% by the end of 2012 and 8.4% by 2013. The countrys
unemployment level remains very high and is a cause for concern in the near term.
Figure 13: Unemployment in the UK, 200515

3.00
9.0
7.0
2.00
6.0
5.0
1.50
4.0
1.00
3.0
Rate of unemployment (%)
Number of unemployed (million)
8.0
2.50
2.0
0.50
1.0
0.00
0.0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Year
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 to
MarketLine, 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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Economic Landscape
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
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 of
the most important demographic characteristics of the UKs population (and one that is proving to be a cause for
concern) is the age structure. The UKs 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 countrys 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 partys 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 late
1990s 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 UKs 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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Social Landscape
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 UKs 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 increasing
slowly 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 UKs 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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Social Landscape
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 UKs 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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Social Landscape
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 for
Wales. 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 UKs 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 execution
of 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 201011, 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
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 children
lived in poverty in the UK, mainly because of factors including family breakdown and poor education.
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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 worldclass 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 200414 was published, which highlighted the
governments 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. According
to the fifth annual Science and Innovation Investment Framework 200414 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, ecommerce, 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, 200311
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 Ofcoms 2011 International Communications Report, the UKs 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 UKs data volumes increased by 124% to an average of 266MB per mobile connection per
month 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 201015. The performance of the market is forecast to accelerate, with an
anticipated CAGR of 8.9% for 201015, 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 200610. 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 million 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 201015. The performance of the market is forecast to decelerate, with an anticipated CAGR of 1.5% during
201015, 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 201015, 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 200610, with only a minor contraction in 2009. The
market is forecast to experience accelerated growth during 201115. The UK pharmaceuticals market had total revenues
of $23.4bn in 2010, representing a CAGR of 2.4% for 200610. 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 201015, 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 201015, 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 201015, 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 200414, 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 competitive
manufacturing 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
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 considerations
do 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 of
shares 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 UKs 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 the
European 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
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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Legal Landscape
Capital gains tax
A capital gains tax is imposed at a rate of 1828% 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 Journals 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 UKs 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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Legal Landscape
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 Controlled
Foreign 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 UKs 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
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. DEFRAs 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 preserve
nature: 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 Countries

Experiencing 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 UKs 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 200812. 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 to
around 538.6 million metric tonnes in 2010.
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Figure 15: Carbon dioxide emissions (million metric tonnes) and growth (%), 200510
600.0
6.0%
4.0%
580.0
560.0
0.0%
540.0
Growth (%)
Million metric tons
2.0%
-2.0%
-4.0%
520.0
-6.0%
500.0
-8.0%
480.0
-10.0%
2005
2006
2007
2008
2009
2010
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 200610. 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 201015. The performance of the market is forecast to decelerate, with an anticipated CAGR of 11.1% for
201015, 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 201015. The UK wind energy industry had total revenues of $1.3bn in 2010, representing a
CAGR of 29% for 200610. 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 201015, 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 200610.
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 201015. 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 201015, 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 governments 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 its emissions by 12.5% compared with 1990 levels by 2012. On a Kyoto
basis, the countrys 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
APPENDIX
Ask the analyst
MarketLines Country Analysis Practice consists of a team of economists, analysts, and researchers, all with expertise
in their given fields. For any questions or comments about this report you can contact the author directly at
reachus@marketline.com
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MarketLine can accept no liability whatever for actions taken based on any information that may subsequently prove to
be incorrect.
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Appendix
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Country Profile Series

PUBLICATION DATE: May 2012

The UK key fundamentals

GDP, constant prices ($bn)

Exports, total as a percentage of GDP

Imports, total as a percentage of GDP

Mid-year population (millions)

GDP, constant 2000 prices, per capita ($)

Unemployment rate (%)

Key Facts and Geographic Location

Structure and policies

Structure and policies

Structure and policies

Structure and policies

Structure and policies

Structure and policies

Ask the analyst

The UK political events timeline

Key political figures

Historical GDP growth, 19912011

GDP and GDP growth rate, 200515

Sector-specific contribution to GDP, 2011

Agricultural output (bn), 200611

Industrial output (bn), 200611

Services sector output (bn), 200611

The UK's external trade position, 200711

Consumer price index and consumer price index-based inflation, 200515

Unemployment in the UK, 200515

Major religions in the UK, 2001

The UK key fundamentals

The UK key facts

Analysis of the UKs political landscape

Analysis of the UKs economy

Analysis of the UKs social system

Analysis of the UKs technology landscape

Analysis of the UKs legal landscape

Analysis of the UKs environmental landscape

Comparative performance on receipt of patents, 200311

Year of ratification of fundamental labor rights conventions

Year of ratification of major international environmental treaties

Key Facts and Geographic Location

KEY FACTS AND GEOGRAPHIC LOCATION

The UK key facts

Country and capital

The United Kingdom of Great Britain and Northern Ireland

Prime Minister David Cameron

British pound (GBP)

GDP per capita, adjusted by purchasing power parity

Total population: 80.17 years

Ethnic composition (2001 census)

White (92.1%), black (2.0%), Indian (1.8%), Pakistani (1.3%), mixed

Major religions (2001 census)

Christian (71.6%), Muslim (2.7%), Hindu (1.0%), , other (1.6%), and

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

Manufactured goods, machinery, fuels, foodstuffs

Key Facts and Geographic Location

Analysis of the UKs political landscape

Strong democratic setup and effective governance

Tensions in the ruling coalition and falling popularity of the

Strong position in global politics

Stronger ties with emerging economies

The SNP may push for independence

Analysis of the UKs economy