Uk - Pestle Analysis

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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

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


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OVERVIEW

Catalyst

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

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

future risks.

Summary

Key findings

The UK has a strong 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



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



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



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



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



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



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


▪ Highly developed economy and favorable investment climate

▪ Excellent environment for doing business

▪ High debt

▪ Budget deficit


▪ Corporate tax reduction

▪ Strengthening the financial system

▪ Stagnant growth may continue

▪ Banking sector vulnerability

▪ High indebtedness


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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PESTLE Analysis



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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PESTLE Analysis



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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PESTLE Analysis



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


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)


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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PESTLE Analysis



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


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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PESTLE Analysis



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



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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. 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


▪ Strong education system

▪ Healthcare services

▪ Child poverty

▪ Relatively high dependency ratio


▪ System of "managed migration"

▪ Supporting low and middle incomes

▪ Challenges of an aging population

▪ Rising inequality


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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PESTLE Analysis



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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PESTLE Analysis



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


▪ Renowned scientific expertise

▪ Effective intellectual property rights

▪ Lack of skilled personnel

▪ Regulatory control over indigenous innovations


▪ Scope for new industries

▪ Outsourced R&D can improve focus on core areas

▪ Declining patent applications by residents


Current strengths

Renowned 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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PESTLE Analysis



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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PESTLE Analysis



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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PESTLE Analysis



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


▪ High in business Freedom

▪ Effective enforcement of legislation

▪ Tax evasion

▪ Finding balance between traditional liberties and increased terrorthreat


▪ Measures to cut down tax evasion ▪ Lack of incentives to attract FDI


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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PESTLE Analysis



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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PESTLE Analysis



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


▪ Strong global influence

▪ Good track record in implementing policies

▪ High air pollution


▪ Proactive policy toward Kyoto Protocol successor

▪ Carbon budget

▪ Balancing environmental protection with economic development


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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PESTLE Analysis



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



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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Political Landscape



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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Political Landscape



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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Political Landscape



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

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