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PESTLE Country Analysis Report: United Kingdom ML00002-031/Published 05/2013
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Country Profile Series
United KingdomIn-depth PESTLE insights
REFERENCE CODE: ML00002-031
PUBLICATION DATE: May 2013
WWW.MARKETLINE.COM
MARKETLINE. THIS PROFILE IS A LICENSED PRODUCT AND IS NOT TO BE PHOTOCOPIED
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PESTLE Country Analysis Report: United Kingdom ML00002-031/Published 05/2013
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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 democ rat ic system, but di f ferences between coal i tion partners in the incum bent
governm ent pose a chal lenge
The UK adheres to a democratic, parliamentary system of governance known as the Westminster system. This system
ensures adequate distribution of power between the executive branch led by the prime minister, the bicameral legislature
and the judiciary.
Growing ideological differences between the Conservatives and Liberal Democrats in the current government is making
the coalition vulnerable. Tensions between pro-Europe Liberal Democrats and euroskeptic Conservatives continue to
plague British politics. Further, conflicting views on issues such as welfare reforms, immigration and the economy are
straining relations.
The UK economy is developed, but ris ing governm ent debt remains a concern
The UK is one of the largest economies in the EU and is one of the strongest in terms of social welfare and standard of
living. Among the EU countries, the UK has one of the highest levels of per capita GDP in terms of purchasing power
parity. According to the World Bank's Doing Business indicators for 2013, the UK is the seventh best country in the world
to do business. The country ranks first in ―getting credit‖, implying that any company wishing to enter the UK faces fewer
hurdles to procure the both working capital and long-term capital requirements.
The UK’s government debt has been increasing constantly, and at £1.38 trillion ($2.11 trillion), reached an alarming
figure of around 90.0% of GDP in 2012 according to Eurostat. It would be difficult for the government to service its
ballooning debt against the backdrop of a contracting economy.
The country h as a strong educat ion and h eal th sector, but income inequal i ty is st i l l apparent
The educational infrastructure in the UK is considered to be of very high quality and has historically attracted students
from all parts of the globe. The nation’s tradition of education dates back hundreds of years and is constantly evolving.
Academic credentials acquired from UK institutions are recognized and respected throughout the world. The UK has
around 170 universities and higher education institutes, including three universities in the world's top 10, according to
The Times Higher Education World University Rankings 2012 –2013. The ranking was based on teaching, research,
knowledge transfer and international outlook. The UK’s healthcare system is one of the most successful social ventures
in the world. This success can be attributed to the presence of 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 maintain the quality
of services provided.
However, rising inequality is a concern. According to the OECD Database on Household Income Distribution and
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Poverty, from the mid-1980s to the late 2000s, real household income for the bottom decile grew by 0.9% annually while
it grew by 2.5% for the top decile. The growth in inequality is more than the OECD27 average.
The UK has strong s cient i f ic and research and development capabi l i t ies, but d ecl ining patent appl icat ions
by residents is a cause for conc ern.
The UK is renowned for the quality of its R&D and its strengths in science and innovation. The country has also
traditionally been keen to encourage R&D in both the public and private sectors. According to the Office for National
Statistics (ONS), gross expenditure on R&D increased to £27.4 billion ($42.03 billion) in 2011, up 5% over 2010
expenditure in terms of current prices. Business R&D increased to £17.4 billion ($26.69 billion), up 8% over 2010. Total
R&D expenditure stood at 1.79% of GDP in 2011, a marginal increase from 1.77% of GDP in 2010.
However, as per World Bank data, the number of patent filings by UK residents fell from 20,426 in 2003 to 15,343 in
2011. Patent filings 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.
Business legis lat ion encou rages comm ercial act iv i ty ; how ever, tradi t ional l ibert ies are coming un der threat
The legislation that affects the business environment in the UK prioritizes the interests of investors. This is evident from
the fact that domestic and foreign players have shown a continuous commitment to investing in the country. The majority
of non-European multinational corporations seeking a presence in Europe tend to establish their Europe operations in
the UK.
The government faces the challenge of maintaining the country’s traditionally liberal values while changing legislation to
help it to deal with the threat of terrorism, as these two priorities are hard to balance. Legislation such as the Terrorism
Act 2006 and the Prevention of Terrorism Act 2005 has been controversial.
The UK has a strong glob al inf luence in environmental issues, but high air pol lut ion 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 effort towards 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 obtain commitments from a number of
developing countries that are unwilling to sacrifice economic growth for environmental gain.
The level of air pollution in London is among the highest in the UK, and the country as a whole is among the most
polluted. Regions such as Manchester, Glasgow and Birmingham also have dangerous levels of NO2. Exhaust fumes
and emissions from factories and power stations around London are the main causes of pollution, and the UK faces a
fine of around £300m ($460.20m) from the European Commission as it has failed to contain these.
PESTLE highlights
Pol i t ical 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, and a member of the G8. Though a
member of the EU, it has a conservative approach to the issue of European integration.
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The Scottish National Party (SNP) won a majority in the Scottish parliamentary elections held in May
2011, and is planning a referendum on independence in 2014. However, independence in unlikely and
there are high possibilities of an increased devolution of powers.
Econom ic landscape
According to the International Monetary Fund, the current account deficit stood at 3.31% of GDP in 2012
and a drop to 2.70% is forecast for 2013.
Due to its ballooning fiscal deficit, the UK's prestigious AAA rating is at risk. Both Fitch and Moody's have
downgraded the economy one notch from its AAA status. Standard & Poor's rates it AAA as of April
2013, but keeps a negative outlook.
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, maintainingexpenditure levels on social welfare projects will prove a challenge.
The government’s policy of "managed migration" could prove crucial in helping to offset the effects of the
aging population on the economy. The speed at which the ratio of children and those aged above 65 is
rising relative to the working age population is of concern to policymakers.
Technological landscape
According to MarketLine, mobile penetration stood at 130.57 per 100 people in 2012 with total
subscribers at 82.21 million. Mobile subscribers grew by an average of 10.88% during 2000 –12. Internet
users as of 2011 stood at 54.47 million, with a penetration rate of 87% in the same year. Internet
subscribers grew at an average rate of 4.76% during 2005 –11.
According to MarketLine, the UK aerospace & defense market had total revenue of $33.2 billion in 2011,
representing a compound annual growth rate (CAGR) of 2% between 2007 and 2011. In comparison, the
French and German markets grew with CAGRs of 0.8% and 3.7% respectively, to reach respective
values of $44 billion and $37.4 billion in 2011.
Legal landscape
The UK was named the 14th freest economy worldwide by the Index of Economic Freedom 2013
compiled by the Heritage Foundation and the Wall Street Journal, and was ranked seventh in the World
Bank's Doing Business indicators for 2013.
British territories of Anguilla, Bermuda, Montserrat, the Turks and Caicos Islands, and the British Virgin
Islands have signed treaties with the UK and other G5 nations to share tax information. The government
has hailed this as a significant step to curb tax evasion.
Environm ental landscape
According to MarketLine, the UK renewable energy market had total revenues of $6.7 billion in 2011,
representing a compound annual growth rate (CAGR) of 12.4% between 2007 and 2011. In comparison,
the French and German markets grew with CAGRs of 3.4% and 3.3% over the same period, to reach
respective values of $11.7 billion and $23.5 billion in 2011.
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According to MarketLine, CO2 emissions in the UK came down from 572.58 million metric tonnes in
2003 to around 532.44 million metric tonnes in 2010.
Key fundamentals
Table 1: The UK – key fundamentals
2010 2011 2012 2013f 2014f 2015f 2016f
GDP, constant 2005 prices ($ trillion) 2.35 2.37 2.37 2.39 2.43 2.48 2.54
GDP growth rate (%) 1.80 0.90 -0.03 0.77 1.73 2.05 2.45
GDP, constant 2005 prices, per capita ($) 37748.19 37533.32 37315.43 37394.37 37833.04 38398.76 39131.73
Inflation (%) 3.32 4.50 2.80 1.92 1.81 1.83 1.93
Exports, total as a percentage of GDP 28.82 30.25 30.64 31.08 31.19 31.14 30.87
Imports, total as a percentage of GDP 31.90 32.74 33.17 33.74 33.94 33.94 33.69
Mid-year population (millions) 62.26 63.18 63.53 63.88 64.23 64.58 64.93
Unemployment rate (%) 7.87 8.08 8.03 8.19 7.99 7.65 7.32
Mobile penetration per 100 people 130.58 130.58 130.57 132.25 133.69 134.91 135.95
Source: Country Statistics, MarketLine M A R K E T L I N E
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TABLE OF CONTENTS
Overview 2
Catalyst 2
Summary 2
Key Facts and Geographic Location 11
Key facts 11
Geographical location 12
PESTLE Analysis 13
Summary 13
Political analysis 14
Economic analysis 16
Social analysis 22
Technology analysis 27
Legal analysis 30
Environmental analysis 32
Political Landscape 34
Summary 34
Evolution 34
Structure and policies 37
Outlook 41
Economic Landscape 43
Summary 43
Evolution 43
Structure and policies 44
Performance 45
Monetary situation 51
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Ask the analyst 67
Disclaimer 67
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TABLE OF FIGURES
Figure 1: Map of the UK 12
Figur e 2: Maj or UK banks’ revenues, costs and profits 18
Figure 3: Major UK banks’ and Global systemically important banks (G - SIBs’) price to book ratios 19
Figur e 4: The UK banks’ provisions and estimated provisions under expected loss accounting 19
Figure 5: The UK- owned banks’ claims to emerging Europe, June 2012 20
Figur e 6: Sectoral debt as a percen tage of GDP, Jun e 2012 21
Figure 7: Econom ic Support Rat io, 1971 –2012 23
Figure 8: Average annual real net investment return of pension funds in % 24
Figure 9: Real househo ld incom e grow th(%) by incom e gro up, mid-1980s to late 2000s 25
Figure 10: Inequal i ty (Gini coeff ic ient) of market income and dispos able (net) incom e in the OECD
area, wo rkin g-age perso ns, late 2000s 26
Figure 11: Patent appl icat ions, residents 29
Figur e 12: The UK – pol i t ical events t imel ine 36
Figur e 13: Key pol i t ical f igures 37
Figur e 14: Comp osi t ion of legis lature 39
Figur e 15: Historical GDP grow th, 1992 –2012 44
Figur e 16: GDP and GDP grow th rate, 2006 –16 46
Figur e 17: Sector-speci f ic contr ibu t ion to GDP, 2012 47
Figur e 18: Agr icu l tural output ( £ b i l l ion) , 2007 –12 48
Figur e 19: Industr ial output ( £ bi l l ion), 2007 –12 49
Figur e 20: Services sector outpu t (£ bi l l ion), 2007 –12 50
Figur e 21: The UK's external trade po si t ion, 2008 –12 51
Figur e 22: Consum er price index and consu mer price index-based inf lat ion, 2006 –16 52
Figur e 23: Unemploym ent in the UK, 2006 –16 53
Figur e 24: Major rel igio ns in the UK, 2001 55
Figur e 25: Healthcare expend itur e, 2005 –11 57
Figur e 26: Educat ion expendi ture, 2005 –11 58
Figur e 27: Internet user s, 2007 –11 60
Figur e 28: Carbon diox ide emissions (mi l l ion m etric tons) and grow th (%), 2003 –10 65
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TABLE OF TABLES
Table 1: The UK – key fundam entals 5
Table 2: The UK – key facts 11
Table 3: Analysis of the UK’s political landscape 14
Table 4: Analysis of the UK’s economy 16
Table 5: Analysis of the UK’s social system 22
Table 6: Analysis of the UK’s technology landscape 27
Table 7: Analysis of the UK’s legal landscape 30
Table 8: Analysis of the UK’s environmental landscape 32
Table 9: Comp arat ive perform ance on receipt of patents, 2009 –12 59
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Key Facts and Geographic Location
PESTLE Country Analysis Report: United Kingdom ML00002-031/Published 05/2013
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KEY FACTS AND GEOGRAPHIC LOCATION
Key facts
Table 2: The UK – key facts
Country and capital
Ful l name The United Kingdom of Great Britain and Northern Ireland
Capital ci ty London
Government
Government type Constitutional monarchy and Commonwealth realm
Head of state Queen Elizabeth II
Head of government Prime Minister David Cameron
Population (2013 est.) 63.39 million
Currency British pound (GBP)
GDP per capita, adjusted by purchasing power parity (2012 est.) $36,700
Internet domain .uk
Demographic details
Life expectan cy (2013 est.) Total population: 80.29 years
Men: 78.16 years
Women: 82.54 years
Ethnic comp osi t ion (2001 census) White (92.1%), black (2.0%), Indian (1.8%), Pakistani (1.3%), mixed(1.2%), and other (1.6%)
Major rel ig ions (2001 census) Christian (71.6%), Muslim (2.7%), Hindu (1.0%), other (1.6%), andunspecified or none (23.1%)
Country area 243,610 sq. km
Language English
Exports Manufactured goods, fuels, chemicals; food, beverages and tobacco
Imports Manufactured goods, machinery, fuels and foodstuffs
Source: CIA – The World Factbook M A R K E T L I N E
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Key Facts and Geographic Location
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Geographical locat ion
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
Source: CIA – The World Factbook M A R K E T L I N E
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PESTLE Analysis
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PESTLE ANALYSIS
Summary
The UK, being an influential member of the European Union (EU) and one of the largest economies in the world, remains
a significant economic and political force. The relative economic decline experienced by the country through most of the
20th century reversed in recent years, with the UK riding out the global downturn relatively well. Its membership of the
United Nations Security Council, the EU, the North Atlantic Treaty Organization (NATO), and the G8, along with 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.
The UK’s efforts to keep a foot in both the European and American camps have proved challenging in the aftermath of
the Iraq war and has put unprecedented strain on the Euro-American alliance. Economic conditions in the country
worsened in 2011 and 2012, with a mounting fiscal deficit and high unemployment rate posing challenges to the
government.
The educational infrastructure in the UK is of a very high standard and is attractive to foreign students. The UK’s
healthcare system is one of the most successful social ventures in the world, predominantly due to the presence of
advanced healthcare infrastructure and the participation of the private sector. Public expenditure on health has
traditionally been very high and has helped to preserve the quality of services.
Despite the quality of educational and research institutions in the UK, there is a shortage of R&D personnel. The legal
system in the UK is transparent and efficient and is conducive to business. In terms of environmental impact, the UK still
needs to improve its air quality by curbing pollution.
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PESTLE Analysis
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Polit ical analysis
Overview
The UK’s political landscape is deeply entrenched in the ethos of democracy and the stable system of governance
ensures that there is a level of consistency in its policies. Following the world wars, the UK developed into a major global
force, largely on the back of its rapid economic development. However, it continues to face terror threats from groups
such as Al-Qaeda. With the Scottish National Party's (SNP’s) landslide victory in elections in Scotland, there is a high
possibility of increased devolution of powers.
Table 3: Analysis of the UK’s political landscape
Current strengths Current challenges
▪ Strong democratic setup and effective governance
▪ Strong position in global politics
▪ Tensions in the ruling coalition and falling popularity of thegovernment
Future prospects Future risks
▪ Stronger ties with India ▪ Terrorism
▪ The SNP’s push for independence
Source: MarketLine M A R K E T L I N E
Current strengths
Strong dem ocrat ic setup and effect ive governance
The UK adheres to a democratic, parliamentary form of governance known as the Westminster system that calls for the
distribution of power between the executive branch led by the prime minister, the bicameral legislature and the judiciary,
with a system of checks and balances. 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 2011, the country had a high percentile rank
of 92.4 for government effectiveness.
Strong pos i t ion in global pol i t ics
After the two world wars, the UK rebuilt itself into a prosperous and modern nation. The UK is a major power in global
politics by virtue of its permanent membership of the UN Security Council, its membership in G8 and NATO, and the
legacy of the British Empire. The UK also has considerable 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 industrial sector and now largely driven by the services industry, have ensured that its firm establishment as a global
business hub and economic power backs its political might.
Current challenges
Tensions in the rul ing coal i t ion and fal l ing populari ty of the governm ent
Growing differences between the Conservatives and the Liberal Democrats is making the ruling coalition vulnerable.
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PESTLE Analysis
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Tensions between pro-Europe Liberal Democrats and euroskeptic Conservatives on the extent of integration with EU
might continue to plague British politics. Further, a conflict of opinion between the two parties on issues such as welfare
reform, immigration and the economy are straining relations. The rising antipathy of Britons towards more integration withEurope has lowered the ratings of Liberal Democrats making it unlikely that they will withdraw from the coalition
government. According to opinion polls in 2013, the Conservatives have declined in popularity while support for the
opposition Labour Party has inched up.
Future prospects
Stronger t ies with India
The rapid economic growth of certain developing countries has made it important for the UK to cooperate with them for
mutual benefit or risk heavy economic losses with the emergence of new, low cost centers of production. At a meeting
between Indian Prime Minister Manmohan Singh and his UK counterpart David Cameron on the margins of the
November 2010 G20 summit, the UK extended its support to India in its campaign for a permanent seat on the UNSecurity Council.
The UK and India have shared a strategic partnership since 2004. This grew stronger in February 2013, when British
Prime Minister David Cameron accompanied the UK’s largest ever trade delegation to India. Several politicians and
executives from nearly a hundred companies accompanied Cameron in an effort to strengthen diplomatic and economic
ties. The UK seeks to double its trade with India 2015.
Future risks
Terrorism
The 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 now facing the country. The July 7, 2005 bombings in London brought the capital to a
standstill, and the public threats issued by extremist groups such as Al-Qaeda are a clear indication of the constant
dangers that they pose. Foiled terrorist attacks have also 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, about 15% of the security services' work is now focused
on East Africa and Somalia in particular, as there are an increasing number of extremists visiting the area for terrorist
training. The committee said the UK faced a range of covert threats to its security, and identified Al-Qaeda as presenting
the most significant risk. In a report titled ―CONTEST The United Kingdom’s Strategy for Countering Terrorism‖ published
by the Secretary of State for the Home Department in March 2013, the government highlighted threats to the UK’s
interests from areas in Pakistan and the tribal areas along the Afghan border, Al-Qaeda in the Arabian Peninsula
(AQAP), Northern Africa, Somalia and Syria.
The SNP ’s push for independence
The SNP won a majority in the Scottish parliament in elections held in May 2011, and is planning a referendum on
independence in 2014. There are major impediments to Scotland breaking away from the UK, including the division of
debt and oil reserves. The SNP has already been pushing for greater financial independence, but its push for full
independence from the UK is likely to be opposed by all other political parties including Labor, the Liberal Democrats and
the Conservatives.
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PESTLE Analysis
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Economic analys is
Overview
The country boasts of high per capita GDP and a favorable investment climate, but the government is challenged by a
high deficit and debt, which has forced it to curtail spending. The government cut corporate tax in a bid to spur growth,
but the economy continues to struggle due to stagnant growth and a banking sector that remains vulnerable due to its
exposure to Europe.
Table 4: Analysis of the UK’s economy
Current strengths Current challenges
▪ Highly developed economy and favorable investment climate
▪ Excellent environment for doing business
▪ High debt
▪ Budget deficit
Future prospects Future risks
▪ Corporate tax reduction
▪ Strengthening the financial system
▪ Stagnant growth may continue
▪ Banking sector vulnerability
▪ High indebtedness
Source: MarketLine M A R K E T L I N E
Current strengths
Highly developed econom y and favorable investment cl imate
The UK is one of the largest economies in the EU and is one of the strongest in terms of social welfare, and standard of
living. Among the EU nations, the UK has one of the highest levels of GDP per capita in terms of purchasing power
parity. According to the World Bank's Doing Business indicators for 2013, the UK is the seventh best country in the world
in which to do business. Further, the country ranks first in ―Getting credit‖—this indicates that any company wishing to
enter the UK faces fewer hurdles in terms of meeting working capital and long-term capital requirements.
Excel lent environment for doing bus iness
The UK is an open and competitive economy, and international businesses view the political and economic institutions
favorably. The country has a robust science base and boasts of strong high tech manufacturing capabilities in
aerospace, defense and automobiles. The UK’s strength lies in knowledge economy sectors such as banking, software
and pharmaceuticals. According to the World Economic Forum’s Global Competitiveness Report 2012 –13, the country
ranks eighth among 144 countries. The UK has a favorable business environment in terms of the availability of skilled
professionals, a central time zone perfectly positioned between the east and the west, a flexible regulatory environment
to start a business, a doorway to the rest of the EU, and a leading global financial center in London.
Current challenges
High debt
The UK government’s debt has constantly been on the rise, and has reached an alarming figure of around 90.0% of GDP
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in 2012, according to Eurostat. The UK government debt reached £1.38 trillion ($2.11 trillion) in the same year. It would
be difficult for the government to service a ballooning debt and 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 mediumterm.
Budg et def ic i t
The financial crisis of 2007 –08 pushed the overall fiscal deficit to 11.5% of GDP in 2009, according to Eurostat; this is the
highest since the Second World War and among the highest in the world. With public finances clearly on an
unsustainable path, the June 2010 budget laid out a five-year adjustment plan that would cut the deficit to 1.5% of GDP
by 2015 –16. The austerity program was extended to 2017 –18 as the economy is struggling to recover. The target deficit
was revised to 2.2% of GDP by 2017 –18 in the 2013 budget. Progress was made in 2010, with the deficit dipping to
10.2% of GDP; the figure was 7.8% in 2011 and 6.3% in 2012. The 2013 budget though, has forecast a deficit of above
7% of GDP in 2013. Cutting the budget deficit amid stagnant growth is a big challenge for the government.
Future prospects
Corporate tax reduct ion
The UK corporate tax rate was cut to 23% from April 1, 2013, and is likely to decrease gradually to 20% by April 1,
2015—this will be among the lowest for G20 nations. This rate reduction is a welcome change for businesses, as they
can spend a greater share of their profits on expansion. This policy will also make the UK a favorable investment
destination for large businesses.
Strengthening the f inancial system
In the wake of the financial crisis and several cases of fraud, the government has taken steps to strengthen the financial
system. A new financial regulation and supervision framework gives the Bank of England authority to monitor the day-to-
day supervision of financial services firms (through the Prudential Regulation Authority). Subsequently, it also gets the
responsibility for macro-prudential supervision of the financial system (through the Financial Policy Committee). The
Financial Policy Committee (FPC) will be in charge for identifying, monitoring and implementing measures to remove or
reduce systemic risks from the financial system. In addition, the Independent Commission on Banking (ICB) is
responsible for the stability of the banking system. The ICB has come up with some recommendations, which are likely to
get legislative approval in 2013. The recommendations include ring-fencing retail banking from global wholesale and
investment banking, and increasing equity capital for large retail banks to 10% of total risk weighted assets. The new
supervisory standards are likely to improve the governance standards of banks.
Future risks
Stagnant growth may cont inue
The government maintained that it would continue with austerity measures to bring down the fiscal deficit in spite of the
economic contraction experienced in 2012. The huge cut in public spending led to a sharp contraction in the construction
sector that had contributed significantly to the economic revival experienced since 2009. Against this backdrop, the path
to recovery looks difficult, as stimulus measures from the government seem unlikely. With the majority of the austerity
measures yet to be implemented, recovery from the recession looks unlikely in the short term.
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Banking sector vulnerabi l i ty
The banking sector remains vulnerable in spite of improved capital ratios, because of a rise in capital and a fall in risk-
weighted assets. The banking system’s profitability remained low and impairments were high in 2012, as shown in the
figure below. Profits were impacted by low net interest margins, the revaluation of own debt and costs for non-
compliance. The banking sector also suffered from high wholesale and retail funding costs.
Figure 2: Major UK banks’ revenues, costs and profits
-100.00
-50.00
0.00
50.00
100.00
150.00
£
b i l l i o n
Year
Total revenues (£ billion)
Pre-tax profits (£ billion)
Impairments (£ billion)
Other costs (£ billion)
Source: Financial Stability Report November 2012, Bank of England M A R K E T L I N E
Further, the market to book values of major British banks were below that of US counterparts (global systemically
important banks or G-SIBs) in 2012, but were above that of European banks, as can be seen in the figure below.
The low valuation clearly reflects the market’s perception of the underlying risks in bank assets and their ability to
generate future profits. The Financial Stability Report November 2012 highlighted that the current impairment
allowance is not enough for the estimated stock of impairments; hence, in the near term, larger than expected
impairments can affect the profitability of banks.
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Figure 3: Major UK banks’ and Global systemically important banks (G-SIBs’) price to
book ratios
0.00
0.50
1.00
1.50
2.00
2.50
P r i c e
t o
b o o k r a t i o s
Major UK banks
US G-SIBs
Other European G-SIBs
Source: Financial Stability Report November 2012, Bank of England M A R K E T L I N E
Figure 4: The UK banks’ provisions and estimated provisions under expected loss
accounting
0
20
40
60
80
100
120
2006 2007 2008 2009 2010 2011 2012
£
b i l l i o n
Year
Current impairment
allowance
Estimated stock of
impairments (expected
loss)
Source: Financial Stability Report November 2012, Bank of England M A R K E T L I N E
Further, the UK banking system has high exposure to Europe, which is a not a good sign considering the crisis in the
peripheral countries. The banks’ exposure to the vulnerable European countries (including Greece, Ireland, Italy, Spain
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and Portugal) amounts to ₤170 billion, which is more than 35% of total exposure in other European countries as of June
2012. In case the crisis worsens, more assets are likely to go bad.
Figure 5: The UK-owned banks’ claims to emerging Europe, June 2012
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
A u s t r i a
B e l g i u m
C y p r u s
G e r m a n y
S p a i n
F r a n c e
G r e e c e
I t a l y
N e t h e r l a n d s
P o r t u g a l
S w e d e n
£
b i l l i o n
Country
UK-owned banks’ claims
on euro-area bankingsystems
Source: Financial Stability Report November 2012, Bank of England M A R K E T L I N E
High indebtedness
The high indebtedness of households, financial institutions and private non-financial corporations (PNFCs) is a cause for
concern. The high debt to GDP ratio is a major reason for restrained private investment and consumption, which curbs
demand growth. The total debt in these three sectors was 359.40% of GDP as of June 2012, according to the Financial
Stability Report November 2012. Household debt stood at 100.21% of GDP, while the debt of financial institutions and
private non-financial corporations (PNFCs) stood at 175.99% and 83.20%, respectively. Further, the report also pointed
out concerns about the debt liability of households. Such high levels of private sector debt can create macroeconomic
imbalances in the economy.
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Figure 6: Sectoral debt as a percentage of GDP, June 2012
0.00
20.00
40.00
60.00
80.00
100.00
120.00
140.00
160.00
180.00
200.00
J a n - 9 2
J a n - 9 4
J a n - 9 6
J a n - 9 8
J a n - 0 0
J a n - 0 2
J a n - 0 4
J a n - 0 6
J a n - 0 8
J a n - 1 0
J a n - 1 2
D e b t a s a p e r c e n t a g e o f G D P
Households
Other financial
institutions
Private Non-Financial
Corporations
Source: Financial Stability Report November 2012, Bank of England M A R K E T L I N E
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Social analysis
Overview
Residents of the UK enjoy a standard of living comparable with those in other developed countries. Decades of solid
economic growth have helped in the development of robust social infrastructure. The UK’s education and healthcare
delivery systems rank among the best in the world. The government is focused on alleviating income inequality and plans
to eradicate child poverty by 2020.
The establishment of the single European market could be positive as a number of young people could migrate to the
UK, and thus offset the problem of an aging population.
Table 5: Analysis of the UK’s social system
Current strengths Current challenges
▪ Strong education system
▪ Healthcare services
▪ Child poverty
▪ Relatively high dependency ratio
Future prospects Future risks
▪ System of "managed migration"
▪ Supporting low and middle incomes
▪ Challenges of an aging population
▪ Rising inequality
Source: MarketLine M A R K E T L I N E
Current strengths
Strong educat ion system
The UK has high-quality educational infrastructure and has historically attracted students from all parts of the globe. The
nation’s tradition of education dates back hundreds of years and is constantly evolving. Qualifications obtained from UK
institutions are recognized and respected worldwide. The UK has around 170 universities and higher education institutes,
including three universities in the world's top 10, according to The Times Higher Education World University Rankings
2012-2013. The ranking was based on teaching, research, knowledge transfer and international outlook.
Healthcare serv ices
The UK’s healthcare system is one of the most successful social ventures in the world. This is due to the presence of
advanced healthcare infrastructure and private sector involvement. The UK’s public expenditure on health has
traditionally been very high, and has helped to maintain quality and efficiency. All residents of the UK, the European
Economic Area, and 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
Chi ld poverty
The government has set a target of eliminating child poverty by 2020. As per the government definition, ―Children are
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said to be living in relative income poverty if their household's income is less than 60% of the median national income‖.
According to The Institute for Fiscal Studies (IFS) forecasts, child poverty will increase to 3.4 million by 2020 from 2.4
million in the past decade. This is in contrast to the improvement seen in reducing child poverty in the previous decade. According to a UNICEF report titled ―Child Well-being in Rich Countries: A comparative overview‖, the UK was ranked
16th among the OECD countries and was clubbed in the group that includes Hungary and Portugal. The government has
to do a lot more to tackle poverty, especially poverty among children, to achieve its goal by 2020.
Relat ively high dependenc y rat io
According to the European Commission, the elderly population (65 and over) as percentage of the total population will
increase from 16.5% in 2010 to 24.6% by 2060. The total dependency ratio, defined as the population under 15 and over
64 as a percentage of the population aged 15-64, will increase by 20%. The dependency ratio has some deficiencies as
it does not does not take into consideration the fact that working-age people who are not employed and children under
working age also receive government support funded by workers’ taxes. According to the Office for National Statistics
(ONS), the economic support ratio—the number of people aged 16 and over in employment for every other person of any
age, including children—is a better indicator that addresses the shortcomings of the dependency ratio. The economic
support ratio fell after the global financial crisis, as more people were unemployed; this resulted in lesser revenue from
worker taxes. Stagnant growth will make it more difficult for the government to fund dependents.
Figure 7: Economic Support Ratio, 1971 –2012
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
Source: Office for National Statistics(ONS) M A R K E T L I N E
Future prospects
System o f "m anaged m igrat ion"
The government’s policy of "managed migration" could prove crucial in helping to offset the effects of the aging
population on the economy. The speed at which the ratio of children and those aged over 65 to the working age
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population is rising is of concern to policymakers. However, to counter the increase in this ratio, the prudent management
of immigration could be a tool to ensure that the UK’s dependent population will have an adequate base of workers to
support it. In addition, the free movement of people and labor in the single European market is also l ikely to help offsetthe issue of a rapidly aging population.
Support ing low and m iddle incomes
The government has taken measures to support families in the low and middle-income categories by cutting income
taxes for them. From 2014 –15, the first £10,000 ($15,340) of income will not attract tax and will help to put more
disposable income in the hands of the households. According to government estimates, this will benefit around 24.7
million individuals. Additionally, £7 billion ($10.73 billion) has been allocated to support lower income households.
Future risks
Chal lenges of an aging popu lat ion
One of the biggest challenges that an aging population brings is finding a way to modify pension schemes so that they
remain sustainable. Due to an aging population, the UK's 6,316 pension schemes accumulated deficits of £236.6 billion
($362.95 billion) as of March 2013, up from £204 billion ($312.94 billion) in March 2012. The IMF pointed out in 2012,
that the UK could face an additional pension cost of £800 billion ($1.22 trillion) by 2050 due to higher life expectancy and
an ever-increasing aging population. Further, according to the OECD, during December 2007-June 2011, the annual real
net investment return of pension funds for the UK went into negative territory and returns fell to -4%. With interest rates in
the developed nations being at a record low, the income outlook for pension funds is bleak in the medium term. With
negative returns, UK pension funds risk deeper deficits. The aging population and unsustainable pension schemes
remain a huge challenge for the nation.
Figure 8: Average annual real net investment return of pension funds in %
-10.0 -5.0 0.0 5.0 10.0
United States
United Kingdom
Hungary
Austria
New Zealand
Korea
Portugal
Australia
Finland
Canada
Norway
Chile
Dec 2007 - Jun 2011
Dec 2001 - Dec 2010
Source: OECD, Global Pension Statistics M A R K E T L I N E
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Rising inequal i ty
Rising inequality is a concern. According to the OECD Database on Household Income Distribution and Poverty, from
the mid-1980s to late 2000s real household income for the bottom decile grew by 0.9% annually, while for the top decile
it grew by 2.5%, as shown in the chart below. The growth in inequality is more than the OECD27 average. The UK ranks
among the top countries in terms of rising inequality. Further, as clearly depicted in Figure 10, market incomes (gross
wages, income from self-employment, capital income, and returns from savings taken together) remain skewed in the UK
than the disposable (net) income. Among the OECD29 countries, the UK has one of the highest levels of unequal
distribution of market incomes. The government should take steps to tackle such high levels of inequality, as it could
distort overall social development.
Figure 9: Real household income growth(%) by income group, mid-1980s to late 2000s
0.0 1.0 2.0 3.0 4.0 5.0
Belgium
Czech Republic
Denmark
Finland
France
United Kingdom
United States
Germany
Italy
Netherlands
Norway
Portugal
Spain
Sweden
Turkey
OECD-27
Top decile
Bottom decile
Total population
Source: OECD M A R K E T L I N E
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Figure 10: Inequality (Gini coefficient) of market income and disposable (net) income in
the OECD area, working-age persons, late 2000s
0.00
0.10
0.20
0.30
0.40
0.50
0.60
S l o v e n i a
D e n m a r k
C z e c h R e p u b l i c
S l o v a k R e p u b l i c
N o r w a y
B e l g i u m
F i n l a n d
S w e d e n
A u s t r i a
H u n g a r y
I r e l a n d
S w i t z e r l a n d
L u x e m b o u r g
F r a n c e
N e t h e r l a n d s
G e r m a n y
K o r e a
I c e l a n d
E s t o n i a
G r e e c e
P o l a n d
S p a i n
N e w Z e a l a n d
J a p a n
A u s t r a l i a
C a n a d a
I t a l y
U n i t e d K i n g d o m
P o r t u g a l
I s r a e l
U n i t e d S t a t e s
T u r k e y
M e x i c o
C h i l e
O E C D - 2 9
G i n i C o e f f i c i e n t i n
l a t e
2 0 0 0 s
Country
Gini coefficient of disposable income
Gini coefficient of market income
Source: OECD M A R K E T L I N E
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Techno logy analysis
Overview
The government has been successful in steering the R&D in the right direction, and is taking steps to boost
competitiveness. 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. The declining trend in the number of patent
applications may hamper the UK's future technological competitiveness in the international market.
Table 6: Analysis of the UK’s technology landscape
Current strengths Current challenges
▪ Renowned scientific expertise
▪ Effective intellectual property rights
▪ Lack of skilled personnel
▪ Regulatory control over indigenous innovations
Future prospects Future risks
▪ Scope for new industries
▪ Outsourced R&D can improve focus on core areas
▪ Declining patent applications by residents
Source: MarketLine M A R K E T L I N E
Current strengths
Renowned scient i f ic expert ise
The UK is renowned for the quality of its R&D and its strengths in science and innovation. The country has also
traditionally been keen to encourage R&D in both the public and private sectors. According to the ONS, gross
expenditure on R&D increased to £27.4 billion ($42.03 billion) in 2011, up by 5% over 2010 expenditure in current prices
terms. Business R&D increased to £17.4 billion ($26.69 billion), up by 8% over 2010. Total R&D expenditure increased to
1.79% of GDP in 2011 from 1.77% of GDP in 2010. There are various R&D initiatives underway in the UK, including the
Research Council’s 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.
Effect ive intellectual property righ ts
As the UK is at the forefront of innovation and R&D globally, it has concurrently developed its legislation concerning the
protection of intellectual property rights (IPR). The UK Intellectual Property Office (UK-IPO) is responsible for granting
IPR. 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. IPR protection legislation is frequently enacted and amended in line with
industry developments.
Current challenges
Lack of ski l led personnel
Despite the quality of educational and research institutions within the UK, there is a shortage of work force in the R&D
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sector. 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, according to the World Bank. Technicians in R&D and equivalent staff are people whose main tasks requiretechnical 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 telecom 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 inno vat ions
The authorities face the unenviable challenge of striking a balance between keeping the distribution of indigenoustechnology profitable and maintaining a competitive advantage. For instance, the UK is a key player in the defense
industry. However, even if companies within this field are able produce innovative products, they might not be able to
profit as much as they could out of doing so, as the dispersion of this technology is sensitive. The government must
therefore closely monitor developments in such industries and decide on a relevant export policy.
Future prospects
Scope for new industr ies
As the UK is at the forefront of new technology, there are good opportunities for the development of relatively nascent
fields such as nanotechnology, space exploration and tourism, and alternative energy. The government has implemented
incentives such as tax concessions to make investment in such industries an attractive proposition. While such venturesare generally capital-intensive and returns are uncertain, 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.
Outsourc ed R&D can impr ove focus on core areas
The trend of outsourcing R&D activity to 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.
These countries provide cheap labor, while the quality of output is about the same. Although it might appear to be a
problem in the short term, this may be advantages in the long run, considering that it might allow companies to focus on
core areas and provide greater scope for new innovative ventures.
Future risks
Decl ining patent appl icat ions b y residents
As per World Bank data, the number of patent filings by UK residents fell from 20,426 in 2003 to 15,343 in 2011. Patent
filings are worldwide patent applications filed through the Patent Cooperation Treaty procedure or with a national patent
office for exclusive rights to 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 2013, the UK is categorized as an innovation
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follower, while Germany is an innovation leader.
Figure 11: Patent applications, residents
0
10000
20000
30000
40000
50000
60000
2003 2004 2005 2006 2007 2008 2009 2010 2011
P a t
e n t a p p l i c a t i o n s
France
Germany
United
Kingdom
Source: World Bank M A R K E T L I N E
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Legal analysi s
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 government
has brought in general tax-avoidance rules to make evasion more difficult in the country. The British overseas territories
have signed a treaty to improve tax transparency, which is likely to make it difficult to avoid taxes. The UK government
will have to bring about changes in its policies to attract FDI and to compete with BRIC and other advanced economies.
Table 7: Analysis of the UK’s legal landscape
Current strengths Current challenges
▪ High in business Freedom
▪ Effective enforcement of legislation
▪ Tax evasion
▪ Finding balance between traditional liberties and increased terrorthreat
Future prospects Future risks
▪ Measures to cut down tax evasion ▪ Lack of incentives to attract FDI
Source: MarketLine M A R K E T L I N E
Current strengths
High in business Freedom
Laws that affect the UK’s business environment have been created and amended with the interests of investors in mind.
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 based outside Europe prefer to control their European operations from
the UK. According to the 2013 Index of Economic Freedom, the UK ranked 14th in the world and fifth in Europe. The
country scores high in regulatory efficiency and open markets. The government has made continuous efforts to ensure
that the overall environment is conducive to business.
Effect ive enforcem ent of legis lat ion
It is important for government to produce effective legislation, but it is also equally important for them to enforce it.
According to the World Bank's Doing Business indicators for 2013, the UK ranked 21st out of 185 countries in terms of
the 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 510 days. Moreover, the number of procedures in
enforcing a contract is 28 days, which is lower than the OECD average of 31 days.
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Current challenges
Tax evasion
Tax evasion and avoidance costs the UK an estimated £14 billion ($21.47 billion) annually. 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. Treasury data shows that those avoiding taxes are primarily wealthy individuals
and corporations, so recouping this money would not harm the vulnerable. The government has brought in general anti-
avoidance rules to make tax evasion more difficult.
Finding a balance between tradi t ional l ibert ies and tackl ing the increased threat of terrorism
The government faces the challenge of maintaining a traditionally liberal society while taking steps to combat terrorism.
For instance, a 2006 law 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,
members of the House of Lords criticized it as restricting freedom of speech. In much the same way, legislation such as
the Terrorism Act 2006 and the Prevention of Terrorism Act 2005 were controversial.
Future prospects
Measures to cut d own tax evasion
The British overseas territories have signed a treaty to improve tax transparency. British territories of Anguilla, Bermuda,
Montserrat, the Turks and Caicos Islands and the British Virgin Islands have signed a treaty with the UK and other G5
nations to share tax information. The government has hailed this as a significant step to check tax evasion. Further, The
Swiss/UK Tax Cooperation Agreement, which came into force from January 2013, is expected to enhance information
exchange and disclosures related to British assets in Swiss banks. Moreover, in May 2013, the G7 countries agreed to
take steps to target tax evasion and avoidance.
Future risks
Lack of incent ives to attract FDI
A number of emerging economies have introduced various pioneering schemes in an attempt to attract foreign
investment. India, Russia, and China, for instance, have introduced various versions of special economic zones, which
attract marquee global investors looking for tax exemptions or tax concessions. One trend that may define this decade is
the increasing attractiveness of Germany to international investors. Germany’s emergence from recession and its
economic leadership in Europe is likely to field a challenge to the UK as a destination for foreign investment. The UK
government will have to change policies to compete with BRIC and other developed economies in attracting FDI.
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Environm ental analysis
Overview
The UK, considered 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 concerted global efforts 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 its own commitments to send a positive signal to other countries.
The UK must effect a greater reduction in the emission 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
developed further. The great challenge lies in balancing economic development with progress in the environmental
situation. This will be especially difficult in the face of increasing competition from emerging markets.
Table 8: Analysis of the UK’s environmental landscape
Current strengths Current challenges
▪ Strong global influence
▪ Good track record in implementing policies
▪ High air pollution
Future prospects Future risks
▪ Proactive policy toward Kyoto Protocol successor
▪ Carbon budget
▪ Balancing environmental protection with economic development
Source: MarketLine M A R K E T L I N E
Current strengths
Strong glob al inf luence
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 effort towards sustainable development and environmental protection. The UK, with its close ties to a number of
countries and its influence through the Commonwealth, has the ability to extract commitments from developing nations
that are unwilling to sacrifice economic growth to protect the environment.
Good track record in implementing po l ic ies
The UK has a good record of accomplishment in achieving a number of its environmental objectives and in expanding its
environmental infrastructure. The country has broadened its environmental objectives because of various international
commitments, and partly as a response to its goal of sustainable development. The step towards integrated pollution
control is a major component of environmental management, although it is only half-complete and its scope is still limited
to large point sources of pollution. The Energy Act 2011 brought about a significant change in the provision of energy
efficiency measures for both homes and businesses. The act seeks to enable and secure low carbon energy supplies
and ensure fair competition in 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
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forces, although it is yet to make extensive use of economic instruments as part of its environmental policy.
Current challenges
High air pol lut ion
In June 2010, the European Commission issued a second and final warning to the UK over air quality, and asked it to
come up with a pragmatic solution to pollution. London suffers from high air pollution, while Manchester, Glasgow and
Birmingham have dangerous levels of NO2. Exhaust fumes and emissions from factories and power stations around
London are the main causes of pollution.
In May 2013, the Supreme Court ruled that the government had failed to bring down air pollution levels as per EU
directives and the European commission can take legal action against the government for non-compliance. This exposes
the government to a fine of around £300m ($460.20m). Around 29,000 deaths in the UK every year are due to air
pollution. The government has to take immediate and decisive steps to control air pollution in the country.
Future prospects
Proac t ive pol icy toward K yoto Protoco l su ccessor
The UK played a central role in galvanizing support for extending the Kyoto Protocol beyond 2012. The UK supported
ratification of the Kyoto Protocol’s 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. The government has set an overall target of an 80% reduction in emissions from 1990 levels by 2050.
The UK's reduction also compares well to cuts achieved in other countries. The government has targeted to limit
emissions to 2,782 MtCO2e during 2013 –17, 2,544 MtCO2e over 2018 –22 and 1,950 MtCO2e over 2023 –27.
Furthermore, the government has started a new mandatory scheme for large public and private sector organizations to
boost energy efficiency and reduce carbon emissions.
Future risks
Balancing environmental protect ion with econom ic developm ent
The dilemma of striking a balance between economic development and protecting the environment is one that will remainan issue for the near 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. In May
2012, former cabinet minister Chris Huhne warned that the UK’s economic growth would 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 the public sector
is transparent and accountable. 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 NationsSecurity 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.
Evolut ion
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. The nation later became the United Kingdom of Great Britain and Northern Ireland after most
of the latter country seceded in 1927.
At the height of its power, the ―British Empire‖ covered around a quarter of the earth’s surface. However, the nation
suffered great losses during the two world wars in the first half of the 20th century. After World War II ended, the Labour
Party came into power and established a welfare system. The UK became a permanent member of the UN SecurityCouncil and a founder member of NATO. The end of World War II also heralded the start of decolonization, whereby a
number of the UK’s colonies gained independence.
1950 –90
In 1961, the UK’s application to join the European Economic Community (EEC) was opposed by French president
Charles de Gaulle, although the country eventually joined in 1973 despite widespread strikes. The late 1960s saw the
start of intense violent conflict 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
community (primarily Protestant), while the unionists opposed the dominance of the nationalists.
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The Conservative Party 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, and successfully regained control over the territory. Under Thatcher, economic reforms took place with theintroduction of free market policies and the privatization of various state enterprises. Thatcher was re-elected twice, in
1983 and in 1987, but resigned in 1990 after facing a challenge for the leadership of the Conservative Party. John Major
was then named prime minister.
1991 –2013
In 1991, the UK, as one of the US’s allies, helped liberate Kuwait from Iraqi occupation. The Northern Ireland peace
process received a boost in 1993 when the UK government issued a joint peace proposal with the Irish government.
Eventually, the Belfast Agreement in 1998 ended 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. Blair’s party was
subsequently re-elected twice, in 2001 and again in 2005 , despite the party’s policy of staunch support for the war on
terror in Iraq and Afghanistan. In 2007, Gordon Brown succeeded Tony Blair as both the head of the Labour Party and
the prime minister.
In June 2009, the governing Labour Party lost the European elections, ending in third position with only 15.7% of the
vote, while the Conservative Party received 27.7%. In the May 2010 elections to the House of Commons, the
Conservative Party won with a 36.1% share of the vote, winning 305 seats. The Conservative leader David Cameron
subsequently went on to form the UK’s first coalition government since World War II in partnership with the Liberal
Democrats.
In December 2011, Prime Minister Cameron disagreed with proposals to make changes in the EU’s Lisbon treaty. He
said that these proposals would jeopardize the status of London as a financial center. In December 2012, both the British
and the Scottish government agreed on a referendum for Scottish Independence in 2014. In January 2013, Prime
Minister David Cameron proposed a referendum by 2017 on whether to leave the EU after the next parliamentary
elections.
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Figure 12: The UK – political events timeline
• World War I began in
1914.
• War ended in 1918
with several hundred
thousand UK soldiers
dead.
• First Labour
government was
elected in 1924.
• Major worldwide
economic crisis was
witnessed in 1931.
• World War II started
in 1939.
• War ended in 1945
and a welfare state
was introduced by the
newly elected Labour
government.
• The UK became a
permanent member of
the UN Security
Council in 1945.
• The UK became a
founder member of
NATO in 1949.
• Queen Elizabeth II was
crowned as queen in
1953.
• The UK intervened in
Suez Canal crisis , but
withdrew due to US
pressure in 1956.
• The UK’s bid to join the
EEC was vetoed by
French President
Charles de Gaulle in
1961.
• The UK joined the EEC
in 1973.
• EEC membership was
endorsed in a
referendum in 1975.
• 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 andunrest in the inner cit ies.
• Thatcher resigned after
she lost the leadership
of her party and she was
succeeded b y Jo hn
Major in 1990.
• In 1991, the UK to ok
part in US-led military
campaign to liberate
Kuwait from Iraqi
occupation.
• Major was re-elected
as prime minister in
1992.
• The UK’s 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 f or 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
office 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 formed a
coalition government
along with the Liberal
Democrats. David
Cameron b ecame the
prime minister.
1914−50 1951− 80 1981−90 1991−2000 2001 Onwards
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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.
Following the passage of the Scotland Act 1998, the Scottish parliament and executive formally came into existence, andthe parliament has the power to make laws, with certain areas being reserved for the parliament of the UK. All areas that
are not reserved for the parliament of the UK come under the purview of the parliament of Scotland. The parliament and
the executive 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 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 recent times, the party has
adopted a "third way" approach to policymaking, combining both socialism and laissez-faire principles.
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 m