UK

Politics:

• Analysis

  UK politics: Quick View - Regulated by law?

  Event

  The UK's three main political parties have agreed a last-minute deal on a new regulatory regime for the press. Reluctance within the Conservative Party, the senior coalition partner, to introduce a press law that could threaten the media's independence means that the new regulatory body will be established by royal charter-an anachronistic device usually used for the foundation of universities and cities under the queen's name.

  Analysis

  The use of the royal charter represents a convenient political fudge, allowing all three parties to claim victory in a long-running debate on statutory regulation of the press. Nonetheless, the substance of the recommendations in late 2012 of Lord Justice Leveson's inquiry into press standards survives. Some questions remain over Internet news coverage, but if the major newspaper publishers back this new regulatory system (at the time of writing this is not guaranteed, with a number of media groups threatening to establish a breakaway watchdog), it will mark a substantial toughening of regulation, with some attempt to guarantee press freedom.

  Lord Justice Leveson wanted a new independent regulatory body to be underpinned by parliamentary legislation, a call backed by both Labour and the junior coalition member, the Liberal Democrats. However, the Conservative Party led by the prime minister, David Cameron, opposed the passage of a press law in case it hurt press freedom. The Tories faced parliamentary defeat on the issue, with Labour and the Lib Dems controlling a majority of seats between them.

  Hence the frantic deal agreed in the early hours of March 18th, in a meeting at the offices of Labour leader Ed Miliband. The prime minister, his culture secretary and the press itself were not present. Rather than being encompassed in a new press law, the regulator will be established by a royal charter granted by the queen rather than parliament. Mr Cameron claimed that he had avoided the need for legislation, but both Labour and the Lib Dems pointed out that there was little practical difference, and that some new modest legislation would still be required (stipulating that a two-thirds majority in parliament would be required to tinker with the terms of the charter).

  The new watchdog can levy fines of up to £1m on the press and also has the power to force papers to issue prominent (including front-page) apologies. The self-regulatory body is responsible for its own independent appointments and funding, and will uphold a beefy code of standards. There will be a free arbitration service for victims of press intrusion and a fast complaints system. It covers news publishers defined as newspapers, magazines and websites containing "news-related" material, although the definition of the last remains hazy.

  March 20, 2013

• Background

  UK: Key figures

  David Cameron

  The youngest prime minister in modern times, David Cameron has enjoyed a largely successful first year in office, despite grumblings from the right of his party that core Conservative Party principles are being sacrificed to the constraints of coalition politics. His assured style of leadership contrasts sharply with his Labour Party predecessor, Gordon Brown, and his approval ratings exceed those of the government and his main political opponents. However, relations with the junior coalition partner, the Liberal Democrats, are now more fraught. Mr Cameron could struggle to strike a balance in keeping an enfeebled Lib Dem party onside so as to hold the coalition together, while continuing to face down strident backbench demands from within his own party not to compromise with the junior governing partner.

  George Osborne

  Still in his thirties, the chancellor of the exchequer is an adept political strategist and Mr Cameron's closest political ally. His medium-term programme to put the public finances on a stable footing assuaged investors' earlier concerns over UK fiscal sustainability, but he will face a battle to keep the deficit-reduction plan on track in the face of much weaker than expected economic growth—a consequence of the deep structural deficiencies in the UK economy.

  Nick Clegg

  Deputy prime minister and Lib Dem leader, Mr Clegg was instrumental in persuading his party to enter a coalition with the Conservatives. The Lib Dems have so far borne the brunt of public discontent, with support for the party haemorrhaging while that for the Conservatives has held up. With the Lib Dem-backed referendum on electoral reform having been soundly defeated in May 2011, he will have to fight to convince his party that it is in their interests to remain in the coalition. His leadership could be challenged if restive Lib Dems become increasingly fearful of electoral annihilation.

  Ed Miliband

  Leader of the main opposition Labour Party, Mr Miliband beat his brother and the former minister of foreign affairs—David Miliband—in a leadership contest after the party's general election loss in 2010. A less convincing public speaker than his brother and with close links to the trade union movement, under his leadership the party has struggled to capitalise on the unpopularity of the coalition's reforms. He has time on his side, but will need to offer a more convincing message to voters and to his party.

  June 15, 2011

• Structure

  UK: Political structure

  Official name

  United Kingdom of Great Britain and Northern Ireland

  Form of state

  Parliamentary monarchy

  Legal system

  Based on statute and common law; no written constitution; Scotland has its own legal system

  National legislature

  Bicameral; the House of Commons has 650 members directly elected on a first-past-the-post basis; the upper chamber, the House of Lords (about 750 members), was reformed in 1999, when most hereditary peers lost their seats; 90 retain them pending further reform

  Electoral system

  Universal direct suffrage from the age of 18

  National elections

  Next general election due on May 7th 2015

  Head of state

  Queen Elizabeth II, who acceded to the throne in 1952

  National government

  Cabinet headed by the prime minister; the prime minister is appointed by the monarch on the basis of ability to form a government with the support of the House of Commons; the UK is governed by a coalition of the centre-right Conservative Party and the centrist Liberal Democrats, which took office in May 2010 after 13 years of uninterrupted rule by the centre-left Labour Party

  Main political parties

  Conservative Party; Labour Party; Liberal Democrats; UK Independence Party; Scottish National Party; Plaid Cymru (Welsh National Party); Northern Ireland parties: Ulster Unionist Party, Democratic Unionist Party, Social Democratic and Labour Party, Sinn Fein

  Prime minister: David Cameron (Con)

  Deputy prime minister: Nick Clegg (Lib Dem)

  Chancellor of the Exchequer: George Osborne (Con)

  Chief secretary to the Treasury: Danny Alexander (Lib Dem)

  Leader of the House of Lords: Lord Hill (Con)

  Leader of the House of Commons & Lord Privy Seal: Andrew Lansley (Con)

  Parliamentary secretary to the Treasury & Chief Whip: Sir George Young (Con)

  Paymaster General & Minister for the Cabinet Office: Francis Maude (Con)

  Secretaries of state

  Business, innovation & skills: Vince Cable (Lib Dem)

  Communities & local government: Eric Pickles (Con)

  Culture, media & sport: Maria Miller (Con)

  Defence: Philip Hammond (Con)

  Education: Michael Gove (Con)

  Energy & climate change: Ed Davey (Lib Dem)

  Environment, food & rural affairs: Owen Paterson (Con)

  Foreign & Commonwealth affairs: William Hague (Con)

  Health: Jeremy Hunt (Con)

  Home office & women & equalities: Theresa May (Con)

  International development: Justine Greening (Con)

  Justice & Lord Chancellor: Chris Grayling (Con)

  Northern Ireland: Theresa Villiers (Con)

  Scotland: Michael Moore (Lib Dem)

  Transport: Patrick McLoughlin (Con)

  Wales: David Jones (Con)

  Work & pensions: Iain Duncan Smith (Con)

  Central bank governor

  Mervyn King

  March 11, 2013

• Outlook

  UK: Key developments

  Outlook for 2013-17

  • The Conservative-Liberal Democrat governing coalition has a solid majority in parliament, but relations are strained. Fiscal austerity and economic weakness will heighten tensions, but an early election would be a gamble for either party.
  • Political stability will also be challenged by issues over Europe. Moves towards closer euro zone governance will increasingly test UK-EU relations. The Labour Party should be well placed to win the 2015 election, but its poll lead is fragile.
  • Protracted economic weakness will make it more and more difficult to sustain progress in closing the UK's large budget deficit. Official austerity plans (already extended from five to eight years) are likely to stretch well beyond 2020.
  • High private-sector indebtedness, resilient unemployment and a dysfunctional banking sector mean that the pace of deficit reduction will lag official forecasts. The coalition will face persistent pressure to do more to boost growth.
  • The Bank of England (BoE, the central bank) will persist with highly accommodative policy, despite above-target inflation. Under new leadership from mid-2013, focus may shift from quantitative easing (QE) to other unconventional steps.
  • After a 6.3% slump in output over five quarters in 2008-09, real GDP recovered only modestly in 2010-12. The Economist Intelligence Unit forecasts sluggish growth of 0.5% in 2013 and an average of 1.1% in 2014-17.

  Review

  • The Conservative prime minister, David Cameron, suffered another blow to his leadership as his party trailed in third place at a parliamentary by-election in late February, behind the populist UK Independence Party (UKIP).
  • The European Parliament provisionally agreed to impose a strict bonus cap on the region's entire banking sector from 2014. The UK favours much looser rules.
  • Net migration to the UK declined by one-third from a year earlier to 163,000 in the 12 months to June 2012, driven by a sharp fall in overseas students.
  • Moody's, one of three largely discredited international ratings agencies, downgraded the UK one notch from AAA to AA1 on February 22nd. The move was politically embarrassing, but there was negligible impact in financial markets.
  • Three of the nine members of the BoE's monetary policy committee voted for additional QE at its February meeting, seemingly contradicting earlier signals from the Bank that had questioned the effectiveness of more asset purchases.
  • Revised official data show real GDP grew by 0.2% in 2012, up from an initial estimate of zero growth. Output fell by a quarterly 0.3% (unrevised) in the final quarter. Survey data point to a modest rise in activity in early 2013.
  • Improved global sentiment, weak UK economic data and clear moves by the BoE to weaken sterling saw the pound fell sharply against major currencies.

  March 11, 2013

Economy:

• Background

  UK: Country fact sheet

  Fact sheet

  Annual data	2012	Historical averages (%)	2008-12
  Population (m)	63.1	Population growth	0.7
  GDP (US$ bn; market exchange rate)	2,440.9	Real GDP growth	-0.4
  GDP (US$ bn; purchasing power parity)	2,284.1	Real domestic demand growth	-0.8
  GDP per head (US$; market exchange rate)	38,656	Inflation	3.3
  GDP per head (US$; purchasing power parity)	36,173	Current-account balance (% of GDP)	-2.4
  Exchange rate (av) £:US$	0.63	FDI inflows (% of GDP)	2.8

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  Background: The end of the second world war coincided with the decline of the UK as an imperial power. Residual links with former colonial territories, close relations with the US and a separate sense of identity delayed UK membership of the European Community (now EU) until 1973. EU membership has proved fraught, with successive governments resisting the bloc's integrationist drift. A gradual shift towards closer economic governance in the euro zone implies an inevitable diminution of British influence over future European policy, with potentially profound implications for UK-EU relations.

  Political structure: The UK is a constitutional monarchy. The head of state is Queen Elizabeth II. Parliament has an elected House of Commons (650 seats) and a non-elected House of Lords (non-fixed membership of around 750). After 13 years of uninterrupted rule by the centre-left Labour Party, the general election in May 2010 produced a rare hung parliament and led to the formation of the UK's first formal coalition government since 1945, comprising the centre-right Conservative Party and, as the junior partner, the centrist Liberal Democrats.

  Policy issues: Economic policy will remain in uncharted waters, with significant levels of financial-sector support, record-low interest rates, unprecedented central bank intervention and an unsustainable fiscal deficit. Further quantitative easing (money printing) is likely. Given the UK's high indebtedness and impaired supply capacity, the coalition will continue to struggle to reconcile its twin aims of deficit reduction and economic recovery. An ambitious eight-year programme of fiscal tightening comprises tax rises and the longest period of real-term public spending cuts since the 1940s. After decades of underinvestment in industrial infrastructure and related skills, and with public capital spending being slashed, credit availability still constrained and many of the UK's largest trading partner economies subdued, achieving any significant economic rebalancing will stretch beyond the forecast period. Structural weaknesses will persist in the large financial sector.

  Taxation: The tax rate on profits of large companies is being steadily lowered, from 28% in 2010 to 22% by 2014 (24% as of April 2012). There are three bands of personal income tax, set at 20%, 40% and 50% (the latter was introduced in April 2010 and will fall to 45% from April 2013). The standard rate of value-added tax (VAT), from which a variety of everyday goods are exempt, rose from 17.5% to 20% in January 2011. Excise duties on tobacco and alcohol are among the highest in Europe.

  Foreign trade: Exports of goods totalled £299bn (US$479bn) in 2011, while imports amounted to £399.3bn, resulting in a trade deficit of £100.3bn. The traditional services surplus widened to £76.4bn. A rising surplus on the income balance was narrowly offset by the transfers deficit, producing an overall current-account deficit of £29bn (equivalent to 1.9% of GDP).

  Major goods exports, 2011	% of total	Major goods imports, 2011	% of total
  Mechanical machinery	12.8	Electrical machinery	12.9
  Electrical machinery	8.8	Mechanical machinery	8.2
  Pharmaceutical products	7.6	Crude oil	6.9
  Leading export markets, 2011	% of total	Leading import suppliers, 2011	% of total
  Germany	13.3	Germany	12.7
  US	10.9	China	7.9
  Netherlands	7.9	US	7.2
  France	7.4	Netherlands	7.1

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  March 12, 2013

• Structure

  UK: Economic structure

  Data and charts: Annual trends charts

  
  

  

  March 11, 2013

• Outlook

  UK: Country outlook

  UK: Country outlook

  FROM THE ECONOMIST INTELLIGENCE UNIT

  POLITICAL STABILITY: The general election in May 2010 resulted in a hung parliament, with no party gaining a majority in the 650-seat legislature. Electoral arithmetic dictated that the most viable option for a stable, majority government was a formal coalition (the UK's first since 1945) of the right-of-centre Conservative Party and the centre-left Liberal Democrats. Its record to date on implementing a fairly radical policy programme is mixed. In the face of opposition from interest groups, it has pushed through contentious reforms to public-sector pensions, the National Health Service (NHS) and higher education. But reforms to the banking sector, education and welfare have been watered down and delayed, while the government's economic record and its progress on consolidating the public finances are poor.

  ELECTION WATCH: Growing tension between the coalition partners, particularly on European and fiscal issues, has shortened the odds of an early general election (the five-year parliamentary term ends in May 2015), but it would be a gamble for either party to trigger an early poll. Given their low standing in opinion polls and the British public's antipathy towards Europe, the Lib Dems are unlikely to withdraw from government. Restless Conservative members of parliament (MPs) may push for an early election, but it remains an improbable scenario given that the centre-right party continues to trail well behind the opposition Labour Party in the polls. The Economist Intelligence Unit's baseline forecast is that the government will just about limp through to the general election in May 2015. Before then, European Parliament elections in June 2014 will be an opportunity for the UK Independence Party (UKIP) to boost its profile further and convince its many sceptics that it is more than an outlet for mid-term protest votes. Given the poor economic backdrop and broad dissatisfaction with the coalition, Labour should be well placed to win the next general election. But although its support has risen since 2010, Labour's poll lead appears fragile in the face of disillusionment with all mainstream parties. Labour will struggle in particular to convince voters that it can offer a credible plan for economic recovery. Thus the election outcome is uncertain, with no party expected to win an outright majority.

  INTERNATIONAL RELATIONS: The coalition is an uneasy alliance between the pro-European Lib Dems and a Conservative Party in which Euroscepticism is dominant (reflecting broad public opinion). UK-EU tensions have risen as the euro crisis has deepened, and are at risk of escalating further over the coming years as the prime minister attempts to renegotiate the terms of Britain's EU membership, in advance of a promised "in/out" referendum by 2018. Labour does not support a referendum, however, so a vote may not occur should Labour enter office. Moves towards closer euro zone economic governance inevitably imply a widening two-tier Europe and diminution of British influence over future EU policy. All the main party leaders want the UK to remain within the Union, but Eurosceptic attitudes in Britain are deeply entrenched and will be hard to reverse. An exit is possible by 2020. A referendum on Scottish independence will take place in late 2014, at which we expect voters to reject full independence but push for enhanced devolution. The government will continue with efforts to deepen the UK's (still modest) commercial ties with emerging powers in Asia and Latin America.

  POLICY TRENDS: Five years after the global financial crisis hit, UK economic policy remains in uncharted waters, with record-low interest rates, unprecedented central bank intervention, a substantial fiscal deficit and widespread financial sector support. Uncertainty will persist over the entire forecast period, as economic weakness at home and abroad weighs on household, sovereign and bank balance sheets. Given the UK's private-sector debt overhang, dysfunctional banks, a propped-up housing market and impaired supply capacity, the government will continue to struggle to reconcile its aims of deficit reduction and economic recovery, as self-imposed fiscal constraints limit policy options in many areas.

  ECONOMIC GROWTH: The UK economy experienced an overall peak-to-trough decline in output of 6.3% over five consecutive quarters in 2008-09, recording the largest annual fall in 2009 since the second world war. The economy's underlying structures remain fragile, highlighted by weak growth of 0.9% in 2011 and 0.2% in 2012. Following the collapse of a huge debt-financed asset bubble and the end of a long period of easy money and cheap imports, the UK faces a protracted process of balance-sheet adjustment, at the same time as long-established trade and financial links with Europe are depressed by the euro zone crisis.

  INFLATION: Annual consumer price index (CPI) inflation eased steadily from its September 2011 peak of 5.2% to 2.2% in September 2012, mainly owing to indirect tax and commodity price base effects. Inflation rebounded to 2.7% in October and has since held steady at this rate, with the result that inflation has now been above the official 2% target for 38 consecutive months. We expect inflation to rise above 3% in the first half of 2013 and to fluctuate around this level into 2014, in response to a stubborn core trend and resilient commodity prices. Domestic economic weakness will persist, but damage to UK productive capacity from the crisis, lagged effects from global monetary stimulus and higher food and energy prices due to the ongoing shift in global demand trends will result in inflation remaining above the central bank's target for most, if not all, of the forecast period. Annual inflation is projected to average 3.2% in 2013 and 2.6% in 2014-17.

  EXCHANGE RATES: After a long period of overvaluation, sterling's real trade-weighted value declined by 30% between mid-2007 and early 2009, falling below its long-term average. The currency recovered some ground in 2010-12, but has recently weakened sharply against all major currencies. A moderate improvement in global market sentiment and weak UK economic data has triggered a shift out of sterling assets, encouraged by fairly explicit efforts by the Bank of England (BoE, the central bank) to "talk down the pound". In real trade-weighted terms, sterling is 25% below its pre-crisis level. With more quantitative easing (QE) likely, The Economist Intelligence Unit expects sterling to weaken against both the US dollar and euro in 2013-14, before rebounding modestly. There is a risk of a severe fall in sterling's value, should investor concerns over the UK's large macroeconomic imbalances (public finances, current account) trigger a flight from the currency.

  EXTERNAL SECTOR: The UK's traditional current-account deficit narrowed to 1.3% of GDP (national data) in 2011, but widened sharply in 2012--mainly reflecting demand weakness across Europe--to an estimated 3.5%, the largest since 1990. The deficit is expected to narrow moderately over the forecast period to around 2-2.5% in 2017. The UK will remain a substantial net energy importer.

  March 05, 2013

• Forecast

  UK: Country forecast summary

  Country forecast overview: Highlights

  • Five years after the global financial crisis hit, economic policy remains in uncharted waters, with record-low interest rates, central bank money printing, an unsustainable fiscal deficit and financial-sector support. Economic weakness and financial stress will persist, as will the risk of euro zone dislocation.
  • The governing coalition of the centre-right Conservative Party and centrist Liberal Democrats has a solid majority in parliament, but tensions have risen as the economic environment has worsened. Government stability will be tested by painful fiscal austerity and prolonged economic weakness. The protracted euro zone crisis poses a major risk to any hope of a sustained economic recovery in the forecast period, while also having profound implications for UK-EU relations. The coalition has little choice but to accept closer euro zone economic governance, even though this implies a diminution of British influence over future EU policy.
  • Given the grim economic outlook and rising public dissatisfaction with both coalition parties, it will be a gamble for either to trigger an early election. But one cannot be ruled out given the government's difficulty in implementing austerity measures amid continuing tension over Europe. The main opposition Labour Party should be well placed to win the 2015 general election, but its poll lead is fragile.
  • Continuing efforts to shrink the UK's largest-ever peacetime budget deficit will dominate policy debate. Protracted economic weakness will constrain the pace of deficit reduction, with the official austerity programme (now extended from five to eight years) unlikely to meet projected targets and set to continue beyond 2020.
  • The highly accommodative monetary policy of the Bank of England (BoE, the central bank) will continue until clear signs emerge of a sustainable recovery or of serious inflation risk. At present, there is little prospect of either. Attention is likely to shift from the current quantitative easing programme of gilt purchases to other non-standard measures, although "liquidity-trap" conditions imply that real economy gains may remain modest. No interest rate rise is likely before 2017.
  • After the collapse of a huge debt-financed asset bubble and the end of a long period of easy money and cheap imports, the UK faces a protracted process of balance-sheet adjustment, at the same time as key financial and trade links with Europe are depressed by the euro zone crisis. Output will be constrained by fiscal retrenchment, private-sector deleveraging, restricted credit flows and weak demand across developed economies. After near-stagnation in 2012, real GDP is forecast to rise by 0.5% in 2013 and to average 1.1% annual growth in 2014-17.

  Country forecast overview: Key indicators

  Key indicators	2012	2013	2014	2015	2016	2017
  Real GDP (% change)	0.2	0.5	1.3	1.6	1.0	0.4
  Consumer price inflation (av, %; CPI measure)	2.8	3.2	2.9	2.7	2.2	2.6
  Budget balance (% of GDP)	-8.3	-7.8	-6.8	-6.0	-5.5	-5.1
  Current-account balance (% of GDP)	-3.5	-3.3	-3.0	-2.5	-2.2	-2.5
  3-month Treasury rate (av; %)	0.8	0.5	0.5	0.6	0.6	0.7
  Exchange rate US$:£ (av)	1.59	1.50	1.46	1.50	1.46	1.45
  Exchange rate €:£ (av)	1.23	1.12	1.11	1.18	1.16	1.15
  Exchange rate US$:€ (av)	1.29	1.33	1.31	1.27	1.26	1.26

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  March 12, 2013

View detailed map

Country Briefing

Land area

244,100 sq km (including inland water), of which 71% is arable and pasture land, 10% forest and 19% urban and other. England totals 130,400 sq km, Scotland 78,800 sq km, Wales 20,800 sq km and Northern Ireland 14,100 sq km

Population

62.262m (official mid-year estimate, 2010)

Main towns

Population in '000 (official mid-year estimates, 2010)

Greater London (capital): 7,825

Birmingham: 1,037

Leeds: 799

Glasgow: 593

Sheffield: 556

Climate

Temperate

Weather in London (altitude 5 metres)

Hottest month, July, 13-22°C; coldest month, January, 2-6°C; driest months, March, April, 37 mm average rainfall; wettest month, November, 64 mm average rainfall

Language

English. Welsh is also spoken in Wales, and Gaelic in parts of Scotland

Measures

Officially metric system, but the former UK imperial system is still widely used

Currency

Pound (or pound sterling) = 100 pence

Time

GMT (summer time, 1 hour ahead)

Fiscal year

April 1st to March 31st; tax year April 6th to April 5th

Public holidays

January 1st, Good Friday, Easter Monday, first Monday in May, last Monday in May (switched to first Monday in June 2012, due to Queen's Diamond Jubilee celebrations, with additional public holiday on June 5th 2012), last Monday in August, December 25th and 26th

January 01, 2013