United Kingdom - International University of Japan · United Kingdom 1 ' The Economist Intelligence Unit Limited 2007 Country Profile 2007 Contents United Kingdom 3 Basic data 4 Politics

Country Profile 2007

United Kingdom This Country Profile is a reference work, analysing the country's history, politics, infrastructure and economy. It is revised and updated annually. The Economist Intelligence Unit's Country Reports analyse current trends and provide a two-year forecast.

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ISSN 0269-798X

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Comparative economic indicators, 2006

Gross domestic product(US$ bn)

Gross domestic product(% change, year on year)

Consumer prices(% change, year on year)

Sources: Economist Intelligence Unit estimates; national sources.

Sources: Economist Intelligence Unit estimates; national sources.Sources: Economist Intelligence Unit estimates; national sources.

Sources: Economist Intelligence Unit estimates; national sources.

Gross domestic product per head(US$ '000)

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United Kingdom 1

© The Economist Intelligence Unit Limited 2007 www.eiu.com Country Profile 2007

Contents

United Kingdom

3 Basic data

4 Politics 4 Political background 4 Recent political developments 9 Constitution, institutions and administration 11 Political forces 13 International relations and defence

16 Resources and infrastructure 16 Population 16 Education 17 Health 18 Natural resources and the environment 19 Transport, communications and the Internet 21 Energy provision

22 The economy 22 Economic structure 23 Economic policy 26 Economic performance 28 Regional trends

28 Economic sectors 28 Agriculture 29 Mining and semi-processing 29 Manufacturing 30 Construction 31 Financial services 32 Other services

34 The external sector 34 Trade in goods 34 Invisibles and the current account 35 Capital flows and foreign debt 35 Foreign reserves and the exchange rate

36 Regional overview 36 Membership of organisations

40 Appendices 40 Sources of information 42 Reference tables 42 Population 42 Transport statistics 42 National energy statistics 43 Gross domestic product

2 United Kingdom


43 Nominal gross domestic product by expenditure 43 Real gross domestic product by expenditure 44 Money supply 44 Interest rates 44 Central government finances 45 Public-sector net cash requirement 45 Government deficit and debt under the Maastricht treaty 45 Prices and earnings 45 Registered unemployment 46 Retail sales 46 Agricultural production 46 Industrial production 47 Construction, Great Britain 47 Stockmarket indicators 47 Exports of goods 47 Imports of goods 48 EU25 and non-EU25 trade 48 Main trading partners 49 Balance of payments, IMF series 49 Foreign reserves 49 Exchange rates

United Kingdom 3


United Kingdom

Basic data

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

60.2m (mid-year official estimate, 2005)

Population in !000 (mid-year estimates, 2003)

Greater London (capital) 7,388 Birmingham 992 Leeds 715 Glasgow 577 Sheffield 513

Temperate

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

English. Welsh and Gaelic are also spoken in Wales and Scotland respectively

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

Pound (or pound sterling)=100 pence Average exchange rates in 2006: US$1.84:£1; "1.47:£1 Exchange rates on May 21st 2007: US$1.97:£1; "1.46:£1

GMT (summer time, 1 hour ahead)

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

January 1st, Good Friday, Easter Monday, first Monday in May, last Mondays in May and August, December 25th and 26th

Population

Main towns

Climate

Weather in London (altitude 5 metres)

Measures

Currency

Time

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Language

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4 United Kingdom


Politics

Political background

The centre-left Labour Party has been in government since May 1997, when it returned to office after 18 years of uninterrupted rule by the right-of-centre Conservative Party. Labour has since been re-elected in 2001 and in 2005. Although the prime minister, Tony Blair, led his party to three consecutive general election victories, his domestic authority was undermined in 2003 by his controversial decision to back the US-led war on Iraq. Following pressure from within his own party, Mr Blair announced his decision to step down from office in mid-2007. Mr Blair will be replaced as prime minister by the chancellor of the exchequer, Gordon Brown.

Recent political developments

The UK consists of four territories: England, Scotland, Wales and Northern Ireland. The first three territories constitute what is otherwise known as Great Britain.

England emerged in the latter part of the first millennium largely from those areas of the main island of Great Britain that came under Anglo-Saxon influence following the collapse of the Roman empire. A key date in English history is 1066, when England was conquered by Duke William of Normandy (William the Conqueror); this was the last successful invasion of the country. The Norman invasion resulted in the imposition of the feudal system, which entailed large-scale grants of land by William to his Norman followers, who became the dominant element of the nobility.

In the two centuries following the invasion of England, the Anglo-Norman regime gradually encroached on Welsh territory, finally conquering all of Wales in 1283. The English system of law and government was gradually extended to Wales, and the two countries were formally united in 1536. The Welsh retained their language, culture and a sense of national identity, but English gradually became the dominant language. During the Middle Ages, the English made several attempts to conquer Scotland, without lasting success. In 1603, on the death of Elizabeth I of England, who had no direct heir, the throne of England passed to her Stuart cousin, James VI of Scotland (who became James I of England). England and Scotland were formally united under the Act of Union of 1707. The Scottish parliament was absorbed into the English one, but Scotland retained its own legal and education systems.

The island of Ireland was initially conquered in the late 12th century by Norman adventurers acting on behalf of Henry II of England. However, English influence and rule were limited until the 16th and 17th centuries, when the practice of "settlement" began. This involved large-scale immigration by Protestant Scots into the north-east of the island, known as Ulster, and grants of land, confiscated from the native Irish aristocracy, to the English nobility.

The nations of the UK

United Kingdom 5


Political and religious struggles during the 17th century were crucial to the constitutional development of the UK. Important events were the execution of Charles I in 1649, an 11-year period of puritanical republican rule under Oliver Cromwell, the restoration of the monarchy in 1660, and the deposition in 1688 of the Catholic monarch, James II, in favour of his Protestant daughter, Mary, and son-in-law, William of Orange. By the end of the century the Anglican version of Protestantism was firmly established as the state religion (except in Scotland), and the powers of the monarch had been curtailed. Secure within its borders and largely free of internal strife (apart from two Scottish uprisings in 1715 and 1745 in favour of descendants of the deposed James II), Britain in the 18th century was an increasingly free, open and innovative society. Science and commerce developed hand in hand, and the country led the world into the industrial era.

The development of the British empire came about as a result of exploration, trading and settlement. At first, British governments interfered only reluctantly to defend the interests of their traders and settlers. Gradually, however, the government became protective of its holdings, and the concept of the British empire gained acceptance. The loss of the American war of independence in 1776 was a setback, but this was counterbalanced by advances into Canada, Australia, New Zealand, the Indian subcontinent, and parts of Asia and Africa. At its height, in the early 20th century, the British empire covered almost one-quarter of the world!s land surface.

In the 20th century the country!s decline was rapid. Although it narrowly averted defeat in two world wars, it did so at great human and economic cost. Since 1945 almost all of Britain!s colonies have become independent, and the country!s relative economic standing fell sharply until the early 1980s, since when it has stabilised.

A feature of domestic politics in the period between 1945 and the mid-1970s was the establishment of a broad consensus on social policy between the Labour Party (which governed in 1945-51, 1964-70 and 1974-79) and the Conservative Party (which governed at the other times). Key elements of this consensus were the National Insurance and the National Health Service (NHS) Acts, introduced by the Labour government under Clement Atlee in 1945 and 1948 respectively. The welfare state, as it came to be known, established the principle of a health service free to all at the point of delivery and the widespread state provision of social security benefits and pensions (these had originated in 1909). The Labour government also pursued a policy of direct state intervention in the economy, which included the nationalisation of important industries, such as coal, power and steel, and the transport sector. The only major reversal of these changes by the Conservative government during its 13-year period of rule in 1951-64 was the denationalisation of the steel industry. The broad consensus on social and economic policy began to break down during the 1970s, as the rise in oil prices in 1973 disrupted the British economy and industrial relations deteriorated.

Empire and the industrial revolution

The post-war period

6 United Kingdom


In May 1979 the Conservative Party, led by Margaret Thatcher, returned to power. Mrs Thatcher, who was to be prime minister for the next 11 years, set out to curb the powers of the trade unions, reduce the state!s involvement in the economy, increase the role of the private sector in the provision of health services and pensions, and open sectors previously run by monopolies to competition. While fiercely resisted at the time, many of these policies have since come to secure wider acceptance. Over the years, however, Mrs Thatcher!s domineering and abrasive style earned her many enemies within her party and outside. During her final years in office she lost touch with voters, most notably over her determination to replace the property taxes, which had hitherto partly funded local government, with the "poll tax" (a flat charge levied on all adults), an unpopular move that provoked riots. Her hostile attitude to the European Community (EC, now the EU) also alienated important figures within her party and brought about her overthrow as party leader and prime minister in November 1990.

Important recent events

June 2001

The Labour Party wins a historic second term with another huge parliamentary majority. William Hague resigns as leader of the Conservative Party.

April 2002

The government announces plans to introduce regional assemblies in England, in a move aimed at addressing the imbalance created by the devolution of powers to the Scottish and Welsh parliaments.

March 2003

Mr Blair gambles his political career by participating in the US-led war on Iraq. The move damages relations with France and Germany.

November 2003

Michael Howard replaces the ineffectual Iain Duncan Smith as leader of the opposition Conservative Party.

January 2004

The Hutton inquiry into the course of events leading up to the suicide of David Kelly, a weapons inspector, exonerates the government of any wrongdoing.

April-May 2004

Continued instability in Iraq and revelations of torture by US (and possibly UK) armed forces weaken Mr Blair!s domestic position further.

May 2005

The Labour Party wins its third consecutive victory at a general election, albeit with a reduced parliamentary majority.

December 2005

The youthful David Cameron replaces Mr Howard as the Conservative Party leader.

The Thatcher years

United Kingdom 7


December 2005

The EU, under British presidency, reaches an agreement on a budgetary framework for 2007-13.

January 2006

Charles Kennedy announces his decision to stand down as leader of the Liberal Democrats.

March 2006

Sir Menzies Campbell is elected to replace Mr Kennedy as leader of the Liberal Democrats.

May 2006

The Labour Party performs poorly at local elections, increasing pressure on Mr Blair to announce the date of his departure from office.

September 2006

Mr Blair responds to growing pressure from within the Labour Party by announcing his decision to stand down as prime minister in mid-2007.

December 2006

Following revelations that anonymous financial backers of the Labour Party were recommended for peerages in the House of Lords (parliament!s revising chamber), Mr Blair becomes the first-ever prime minister to be interviewed by police in a criminal investigation.

May 2007

The Labour Party fares poorly at local elections and is displaced as the leading party in elections to the Scottish parliament. Formation of a historic power-sharing government in Northern Ireland involving two historical foes: the Democratic Unionist Party (DUP) and the republican Sinn Fein. Mr Blair announces his intention to step down as prime minister on June 27th. The chancellor of the exchequer, Gordon Brown, will replace him.

Mrs Thatcher was replaced as prime minister by John Major, who won the next general election in May 1992. However, the Conservative Party!s fourth successive term in office (1992-97) coincided with a downturn in its fortunes. In September 1992 speculative pressure in the financial markets forced sterling out of the exchange-rate mechanism (ERM), a humiliating episode that dented the party!s reputation for economic competence. Mr Major!s premiership was also dogged by increasing allegations of "sleaze" against individual parliamentarians and by party feuds over government policy towards the EU. Voters came to the view that after 18 years in office, the party was tired, divided and out of touch.

In the intervening period, the Labour Party, which was widely considered to be unelectable in the early 1980s, had undergone a painful process of ideological and organisational reform. Tony Blair, who became the Labour leader in 1994, positioned the party close to the political centre and embarked on a campaign to modernise its image. After years of decline, membership began to rise, and the party came again to be seen as a viable alternative to the Conservatives. On

The Conservatives' fortunes in decline

Labour's return to government

8 United Kingdom


May 1st 1997 the Labour Party secured an overwhelming victory at a general election. The new government was not elected on a programme of radical economic change. Indeed, Labour embraced many of the microeconomic reforms, such as privatisation, that it had fought against in opposition. At the outset at least, the main departures were an ambitious programme of constitutional reform and a more pro-European foreign-policy orientation.

The Labour Party was re-elected to office in June 2001 with the largest-ever parliamentary majority for a governing party in its second term. However, the Labour government!s second term was overshadowed by the domestic and international fallout from Mr Blair!s active support for the US-led war on Iraq in March 2003. Mr Blair led his party to a third consecutive general election victory in May 2005, but the widespread perception that he had misled the country to justify British participation in the Iraq war lost his party considerable support and reduced Labour!s parliamentary majority from 161 seats to 67. This was compounded by the presence of a hard core of rebels bitterly opposed to elements of the government!s programme and to Mr Blair!s premiership. Against this backdrop, Mr Blair found it increasingly difficult to assert his authority and to push through his legislative programme.

In September 2006 Mr Blair caved in to growing pressure from within his party by announcing a broad timetable for his departure from office. In May 2007 Mr Blair said that he would step down from office on June 27th 2007.

The search for a constitutional solution to the sectarian strife between the Protestants and Catholics in Northern Ireland has been a major concern of UK governments for nearly 30 years. While a narrowing majority of the population of Northern Ireland is Protestant and favours maintaining the union with the rest of the UK ("unionists" or "loyalists"), just over 40% are Catholics, most of whom want unity with the Republic of Ireland ("nationalists" or "republicans"). Between 1921 and 1971 Northern Ireland had its own devolved assembly, which reflected the wishes of the Protestant majority and often discriminated in its favour. Dissatisfied Catholics began to call for more civil rights during the 1960s, with some turning to violence. During these years the Irish Republican Army (IRA), a nationalist paramilitary organisation dedicated to achieving a united Ireland, re-emerged. British troops were sent to Northern Ireland in 1969 to curb the rising tide of violence, and in 1972 direct rule of the province from London was established.

The next 25 years were marked by widespread violence and atrocities on both sides of the sectarian divide. In the mid-1980s, however, the British and Irish governments began to co-operate to help to bring about a long-term solution to the problem. The importance of the Irish Republic in determining the future of Northern Ireland was recognised by the British government in 1985 with the signing of the Anglo-Irish agreement (which established a forum for discussing areas of mutual concern) and in December 1993 with the Downing Street declaration (a document that aimed to increase collaboration between the two governments and to create the conditions for an end to the violence in Northern Ireland).

Northern Ireland

United Kingdom 9


After some prevarication, the IRA declared a ceasefire in 1994, and discussions began about the organisation of formal peace talks. The IRA broke its ceasefire in 1996, resulting in the exclusion of Sinn Fein, the political wing of the IRA, from the talks when they began in June of that year. However, in mid-1997 the IRA declared a new ceasefire, and Sinn Fein was admitted to the talks in September. Despite seemingly intractable difficulties, a peace agreement was signed by most parties on Good Friday, April 10th 1998. This provided for a directly elected assembly in Northern Ireland with legislative powers, mechanisms for North-South co-operation within the island of Ireland, a British-Irish Council and measures to promote non-discrimination between the communities. It also provided for a change in the constitution of the Irish Republic to remove those articles that laid territorial claim to Northern Ireland. The agreement, which was ratified in two separate referendums in Northern Ireland and the Irish Republic on May 22nd 1998, recognised that any change in the territory!s status could take place only with the consent of the people living in Northern Ireland.

The implementation of the agreement was fraught, however. The devolved government was suspended in October 2002, when the IRA was accused of operating a spy ring in the province!s governing institutions, and the IRA!s continued involvement in criminal and subversive activity raised further questions about its commitment to the peace process and democratic politics. At the 2005 general election, support for Sinn Fein and the Democratic Unionist Party (DUP) rose at the expense of the moderate parties on both sides of the sectarian divide. However, despite this polarisation of support, the Northern Ireland Assembly was restored following a statement from the IRA on July 28th 2005 that it was committed to using "exclusively peaceful" means to achieve its ends. In April 2007 the DUP and Sinn Fein agreed to participate in a joint power-sharing executive.

Constitution, institutions and administration

The UK has no written constitution as such. The constitution exists as a body of statutes, common law (based on judicial decision and precedent) and convention. The UK is a constitutional and hereditary monarchy, of which the current head of state, Queen Elizabeth II, has reigned since 1952. All effective authority resides with the elected lower chamber of parliament, the House of Commons. In theory, the monarch retains the power to call and dissolve parliament, to give assent to bills passed by parliament, to appoint the prime minister, and to sign treaties or declare war. In practice, most of these acts are performed by government ministers, and the "royal prerogative" is not used in a manner contrary to that suggested by the democratically elected government. The monarch!s constitutional role is one of influence, often exercised through confidential weekly meetings with the prime minister. This influence varies according to the experience of the monarch and the relationship with the prime minister.

Parliament is divided into two houses, the House of Lords and the House of Commons. The former previously consisted mainly of hereditary peers and life

The role of the monarch

Parliament

10 United Kingdom


peers, but most hereditary peers lost their seats under a first stage of reform in 1999. Laws enacted by parliament require the assent of both houses, but Acts of Parliament passed in 1911 and 1949 limit the powers of the House of Lords to prevent bills passed by the House of Commons from becoming law. The main purpose of the House of Lords is to revise and amend laws proposed in the House of Commons, but its suggested revisions can be overruled by the latter.

The main parliamentary chamber, the House of Commons, is democratically elected and consists of 645 members (one for each constituency). The House of Commons enjoys virtually untrammelled powers to legislate (in contrast to parliaments in most other advanced democracies, the powers of which are usually circumscribed by the constitution). This concentration of power is compounded by the first-past-the post electoral system, which often gives large parliamentary majorities to parties that do not enjoy the majority support of the electorate. The doctrine of parliamentary sovereignty, combined with the first-past-the-post electoral system, has moved liberal critics to call the UK an "elective dictatorship" because there are few checks and balances, and the executive can often impose its programme without meaningful opposition in parliament or from the courts.

The most influential government ministers are traditionally the chancellor of the exchequer, who is responsible for the government finances and economic affairs; the home secretary, whose ministry is responsible for law and order, immigration and other domestic issues; and the foreign secretary, who is responsible for foreign affairs. The importance of the remaining ministers varies according to the priorities of the government of the day. For the current government, the other important cabinet members are the secretary of state for health; the secretary of state for education and skills; and the secretary of state for work and pensions.

In the absence of a written constitution, the judiciary lacks the formal role of constitutional guardian that it has in many other west European countries, but it remains responsible for interpreting and enforcing the law and ensuring that the executive acts within its proper authority. Responsibility for interpreting the law gives the judiciary considerable scope to influence its practical application, particularly since English law relies heavily on judicial precedent. Scottish law, although founded on common law, has been more influenced by Roman law, and proceedings in Scotland differ from those in the rest of the UK. During the Labour government!s first term in office, the European Convention on Human Rights (ECHR) was introduced into UK law, some 50 years after it was signed. The transposition of the ECHR has enlarged the role of the courts and imposed new constraints on the executive.

During the previous Conservative administration (1979-97), the powers of local government were significantly reduced. Mrs Thatcher!s period in office was marked by deep hostility to local government, which she perceived to be a vehicle for municipal socialism, an obstacle to the will of central government and a drain on the public finances. During the 1980s and 1990s the government capped the level of revenue that local councils could raise through local taxes;

Government departments and ministers

The judiciary

Local government

United Kingdom 11


increased the central government!s share of#and hence control over#local government spending; and weakened local governments! powers in relation to areas such as education. Local authorities have also been obliged to put out to tender many services that they had previously provided using their own employees. The current government established a new representative body and an elected mayor for the capital, London, as well as mayors in several other cities, but their powers are limited, and there are no plans to inject new life into local authorities.

Political forces

The Labour Party emerged as a political grouping at the end of the 19th century, growing out of a complex of organisations, notably the trade unions. After the first world war, Labour displaced the Liberal Party as the main political alternative to the Conservative Party. Labour governed the country in 1945-51, 1964-70 and 1974-79. It returned to power in 1997 after 18 years in opposition.

During its long period in opposition, Labour was transformed. After a brief lurch towards the left at the beginning of the 1980s, the party gradually moved back towards the political centre, weakening its links with the trade union movement and downplaying its previous emphasis on redistribution in an effort to widen its appeal to the middle classes. The "new" Labour Party is centrist and pragmatic, but its traditional supporters regret its abandonment of key tenets of socialist doctrine and resent the tight control exercised by the party!s leadership.

The Conservative Party traces its roots back to the Tory Party of the 18th century. Traditionally, it has embraced right-of-centre policies and has drawn much of its support from business interests and the affluent. It also tends to enjoy greater support among the old than the young, and among rural rather than urban dwellers. In recent years it has suffered dramatic declines in support in Scotland and Wales and is now primarily an English party.

Although the Conservative Party was easily the most successful political party in the UK during the 20th century (in terms of general elections won), it suffered its heaviest defeat since 1906 at the general election in 1997. Since then it has made halting progress in recapturing the ground lost. Between 1997 and 2005, the party found it difficult to shake off its tired image with voters and overcome the bitter divisions, particularly over Europe, that have raged within it since Mrs Thatcher was deposed as leader in 1990. However, the latest Conservative leader, David Cameron, appears to be presiding over an upturn in the party!s fortunes.

The third-largest party, the Liberal Democrats, was established in the late 1980s by the merger between the Liberal Party and part of the Social Democratic Party, which had itself been formed in 1980 by disaffected senior Labour Party figures. The Liberal Party was the heir of the old Whig Party and alternated with the Tories as the party of government in the 19th century. It was displaced as the main alternative political force to the Conservatives by the Labour Party after the first world war (1914-18). Since then, its electoral fortunes have

The Labour Party

The Liberal Democrats

The Conservative Party

12 United Kingdom


fluctuated. Of the three main parties, the Liberal Democrats were the only political formation to record a significantly increased share of the vote at the 2005 general election.

As a result of the voting system, the Liberal Democrats! representation in the House of Commons has always been much smaller than its share of the vote. Relations between the Liberal Democrat leadership and the Labour Party were quite close when the latter returned to office in 1997, but relations have since cooled, and the two parties have gradually distanced themselves from each other.

Main political figures

Tony Blair

Prime minister. Despite being exonerated by an independent inquiry of embellishing intelligence material to exaggerate the threat posed to the UK by Saddam Hussein, the domestic standing of Mr Blair has been badly damaged by the failure to find weapons of mass destruction in Iraq. Although he led his party to an unprecedented third consecutive general election victory in May 2005, Mr Blair soon came under pressure to resign before the end of his parliamentary term. In May 2007 he announced his decision to step down as prime minister on June 27th.

Gordon Brown

Chancellor of the exchequer. A brooding and deeply ambitious politician, he can claim credit for Labour!s rehabilitation as a party of sound economic management (although he is often criticised for his obsessive tinkering with the tax and benefits system). Mr Brown has attracted criticism for his autocratic streak, but he has deeper roots in the Labour Party than Mr Blair and is not regarded with quite the same suspicion by the party membership. Despite growing doubts about his ability to revive the fortunes of the Labour Party, Mr Brown will replace Mr Blair as prime minister in late June 2007.

David Cameron

Leader of the Conservative Party. Mr Cameron has made an impressive start since emerging as a dark horse to replace Michael Howard in December 2005. Opinion polls suggest that his relaxed personal style and his attempts to drag his party back towards the centre ground of politics have gone down well with voters#an impression confirmed by the party!s solid showing at local elections in May 2006 and May 2007. However, his decision not to burden himself in the short term with too many detailed policy commitments has opened him up to accusations that he has more style than substance.

Sir Menzies Campbell

Leader of the Liberal Democrats. An elder statesmen, Mr Menzies replaced Charles Kennedy in March 2006 after a lacklustre leadership campaign. Sir Menzies has long been a measured and respected commentator on foreign affairs, but his views on domestic issues are less well known. In addition, his advanced age (he is 64) inevitably gives him the look of a stop-gap leader who will be replaced after the next general election.

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Other parties represented in parliament include two nationalist parties, Plaid Cymru in Wales and the Scottish National Party (SNP) in Scotland. Plaid Cymru won three seats in the 2005 general election and the SNP six. Since May 2007, the SNP has been the largest party in the Scottish parliament and has headed the devolved coalition government. Plaid Cymru, meanwhile, is the leading opposition in the Welsh Assembly.

Northern Ireland returns 18 members of parliament to Westminster. There are two major unionist parties, the Ulster Unionist Party (UUP, often referred to as the official unionist party) and the Democratic Unionist Party (DUP). The DUP, led by the Reverend Ian Paisley, made large gains at the expense of the UUP at the 2005 general election. The two nationalist parties are Sinn Fein and the Social Democratic and Labour Party (SDLP).

General election results 1992 1997 2001 2005 No. of % of No. of % of No. of % of No. of % of seats vote seats vote seats vote seats voteLabour 271 34.4 418 43.2 412 40.8 356 35.2

Conservatives 336 41.9 165 30.7 166 31.8 197 32.3Liberal Democrats 20 17.8 46 16.8 52 18.3 62 22.0

Democratic Unionists 3 0.3 2 0.3 5 0.7 9 0.9Scottish National Party 3 1.9 6 2.0 5 1.8 6 1.5Sinn Fein 0 0.2 2 0.4 4 0.7 5 0.6

Plaid Cymru 4 0.5 4 0.5 4 0.7 3 0.6Social Democratic & Labour Party 4 0.5 3 0.6 3 0.6 3 0.5

Ulster Unionists 9 0.8 10 0.8 6 0.8 1 0.5Respect 0 0.0 0 0.0 0 0.0 1 0.3

Others 1 1.7 3 4.7 2 3.8 2 5.6Total 651 100.0 659 100.0 659 100.0 645 100.0

Source: House of Commons.

International relations and defence

The most explicit and influential conceptual framework for British foreign policy was laid down by the then prime minister, Winston Churchill, at the end of the second world war. Known as the doctrine of the "three circles", this stated that the UK!s global status could be maintained by its central position in the "three overlapping circles" of transatlantic relations, western Europe, and the British empire and Commonwealth. The doctrine!s impact on foreign policy has waned over the years, particularly as a result of decolonisation and the limited influence of the Commonwealth. Even so, traces of its influence are still discernible, notably in the current government!s vision of itself as a "bridge" between the US and the EU.

One of the most decisive changes in British foreign policy since the end of the second world war has been the disengagement from empire and the gradual downgrading of the importance of the Commonwealth, which groups many former British colonies, as a focus for diplomatic activity. The UK retains generally friendly ties with most members of the Commonwealth#a notable exception at present being Zimbabwe#but these are looser than those

The "three circles"

Regional parties

The Commonwealth

14 United Kingdom


maintained by France in francophone Africa. For the UK and, indeed, many other Commonwealth countries, the development of political and economic links with neighbouring countries has increasingly taken precedence over the maintenance of post-colonial relationships. The Commonwealth still provides a useful forum for the exchange of views, but its future remains in question.

The attempt to maintain a "special relationship" with the US has been a constant of British foreign policy since 1945. The UK!s relationship with the US has been closer than with any other country, underpinned by a common language and broadly shared assumptions about the virtues of democracy and free trade, as well as shared perceptions about threats to the international order. In supporting the US-led war on Iraq in 2003, the UK was conforming to type. Nonetheless, the relationship is more "special" to the UK than it is to the US. While the US undoubtedly appreciates the UK!s faithfulness as an ally, the maintenance of close relations with Israel, Japan and Germany has usually been of equal importance. Indeed, for much of the period since the 1960s the US has sought to persuade the UK that its value to the US would be enhanced if it chose to play a leading part in Europe, rather than seeking to carve out a role at arm!s length from Europe, based on its "special relationship" with the US.

The UK has long cultivated a feeling of separateness from the rest of western Europe and has tended to be a late and reluctant participant in regional integration. The sense of difference and distance has been encouraged by the country!s island geography, which separates it from the European continent and which has been a key factor in the preservation of its territorial integrity over the centuries. Unlike other European countries, the UK was not overrun in either of the two world wars. This partly explains why it has never felt the need to participate in regional integration with the same urgency as its continental partners.

The UK only joined the European Communities (EC) in 1973, long after the launch of the European Coal and Steel Community in 1951 and the European Economic Community in 1957. Within only a year of the UK joining the EC, a Labour government entered office committed to renegotiating the UK!s terms of accession and to holding a referendum on membership. The electorate voted by two to one to remain in the EC in 1975, but the early hesitancy has set the tone for the country!s membership ever since.

Relations with the EC in the first five years of Mrs Thatcher!s government were dominated by her complaint that the UK!s net contribution to the EU budget was excessive, a debate that was only resolved with the negotiation of a special rebate for the UK in 1984. The UK played a constructive role in the formulation of the single-market programme, which was backed by the expansion of majority voting in the Single European Act of February 1986, but this proved the high point of the Thatcher government!s relations with the EC. Thereafter, the government!s attitude to further integration turned progressively more hostile, particularly following the signature of the Treaty on European Union (Maastricht treaty)#which committed the EC, now renamed the European Union (EU), to launching a single currency#and the UK!s unhappy experience with its membership of the ERM in the early 1990s. The UK!s opposition to the

Relations with the EU

The "special relationship" with the US

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drift of European integration was accompanied by increasingly strident rhetoric against EU policies and institutions, and by the end of Mr Major!s term of office, some Conservative parliamentarians were even calling for the UK!s withdrawal from the EU.

Mr Blair entered office in 1997 promising to repair the UK!s damaged relations with the EU and to play a "leading part in Europe". At the outset, he earned goodwill among his EU counterparts by being more constructive than his two immediate predecessors, Mrs Thatcher and Mr Major, and by developing common initiatives with other countries in areas where their interests coincided. Although Mr Blair has never seen any conflict between his government!s pro-Europeanism and Atlanticism, US-European disputes over trade and environmental policy have often placed him in an awkward position. His support for the US-led war on Iraq, moreover, reinforced suspicions in some EU countries that the UK will always subordinate its relations with them to its relations with the US.

Military forces, 2006 Active Army 104,980Navy & marines 40,840Air force 45,210Total 191,030Reserves Army 134,180Navy & marines 22,200Air force 42,900Total 199,280

Source: International Institute for Strategic Studies.

The UK is a firmly committed member of NATO, and the quality of its armed forces is high. Defence spending, which amounted to 2.2% of GDP in 2006, has been cut in real terms since the implosion of the communist bloc in central and eastern Europe in the late 1980s and the subsequent disintegration of the Soviet Union. Military service has been voluntary since the 1950s. According to the London-based International Institute for Strategic Studies, the active armed forces of the UK numbered 191,030 in 2006. Many are stationed abroad, but the army has also played a major role in maintaining order in Northern Ireland. The UK played a significant role in the alliance!s campaign in Kosovo and has taken part in peacekeeping missions in Bosnia and Hercegovina. The UK sent many troops to participate in the Gulf war in 1991 and contributed substantial forces to the US-led wars in Afghanistan in 2002 and Iraq in 2003. However, the steady reduction in the number of UK forces, exacerbated by difficulties in recruitment and ongoing commitments in Northern Ireland and elsewhere, means that the participation of the armed forces in such arenas has frequently stretched available resources.

Defence

Foreign policy since 1997

16 United Kingdom


Resources and infrastructure

Population

According to revised estimates based on the 2001 population census, the UK population at mid-2005 (the latest year for which official data are available) stood at 60.2m. During most of the 1990s, population growth averaged 0.3% per year. Since the late 1990s growth has picked up, averaging 0.4% per year.

Until the mid-1990s the increase in the population was primarily driven by "natural change" (that is, an excess of births over deaths). As in other developed countries, lower fertility rates and rising life expectancy have contributed to the ageing of the population. The number of retired people is set to rise further over the next decade, placing growing pressure on state-funded and occupational pension schemes.

An increasingly important factor behind the growth in population in recent years has been net international migration into the UK. The number of people migrating to the UK has long exceeded the number of people leaving. Even though the number of people leaving the UK has risen since 1997, it has not done so by as much as the number of people migrating to the UK. As a result, net international migration to the UK has risen by an annual average of 150,000 since the late 1990s, three times more than in the mid-1990s. The rise in net migration to the UK has fuelled often incendiary headlines in much of the printed media and pushed the issue up the political agenda. The government!s response has been to tighten general immigration rules, but to relax rules for skilled migrants. The government resisted pressure to impose immigration controls on citizens from the ten countries that acceded to the EU in May 2004, but the huge influx that this encouraged forced the government to impose temporary restrictions on workers from Bulgaria and Romania, which joined the EU in 2007.

The population of England has risen by 5% over the past 20 years, lifting its share of the UK population to 84% of the total. The fastest growth has been in the southeast of England, a reflection of the relative economic dynamism of the region. The vast majority of the UK population is concentrated in urban areas: some 90% live in towns or urban agglomerations, and over 50% live in areas with 100,000 people or more. The population of the capital, London, has risen by 5% over the past 20 years, reversing a 60-year period of decline. By contrast, the population of northern England has fallen (with the populations of Liverpool and Manchester declining by 15% and 15.1% respectively). The only region of the UK to suffer a fall over the same period has been Scotland.

Education

Most children attend the free state-school system, although there are many fee-paying schools. There are three stages of education: primary, secondary and tertiary. The first year of compulsory education begins around the age of five. Secondary school typically starts at 11 years of age and continues until 18, but

Demographic profile

The three stages of education

The UK's population is primarily urban

United Kingdom 17


compulsory schooling ends at 16. Selective schools exist, but most secondary education is provided by comprehensive (mixed-ability, non-selective) schools. Primary and secondary education is first and foremost the responsibility of local authorities, although individual schools can now choose to "opt out" of direct local authority control. Tertiary education is the responsibility of central government and includes universities, colleges, teacher training colleges and vocational institutions.

The top British universities are among the best in western Europe (and the world). However, the share of young Britons attending higher education has risen sharply since the early 1990s, prompting concerns about declining standards. From just 12% in 1990, the proportion of graduates to the population at the typical age of graduation has risen to almost 40%. British universities, moreover, remain underfunded, particularly compared with their competitors in the US. The UK spends just 1.1% of GDP on higher education, compared with an EU average of 1.2%, and 2.6% in the US. In an effort to increase funding for higher education, in 2004 the government adopted a controversial law allowing universities to charge variable annual tuition fees of up to £3,000 (US$5,460) per year until 2009.

A number of reforms have been introduced to improve the education system. Provision for pre-school education has been increased to give children a basic foundation in literacy and numeracy. In 1970-71 just 21% of three- and four-year-olds attended part-time nursery schools or playgroups, but this has now risen to nearly two-thirds. Recent governments have also tried to standardise education, notably by introducing a national curriculum, and upper secondary education has been reformed with the introduction of national vocational qualifications and a broadening of the scope of the academic A-level exams (which are taken at the age of 18). The UK scores respectably in international comparisons of pupil achievement for under-16s. The OECD!s Programme for International Study Assessment (PISA), for example, indicates that reading, mathematical and scientific literacy levels among 15-year olds are now above the EU average.

The UK!s main area of weakness is the comparatively high share of the population that drops out of school at the age of 16. The provision of vocational training for those who leave school early is poor. Few who enter the labour force without an academic qualification have an apprenticeship or technical-level qualification, and such workers do not generally catch up through workplace training. The Labour Party government has tried to tackle the problem by strengthening links between secondary education and industry, expanding modern apprenticeships and compensating employers for offering low-skilled staff time off to obtain basic qualifications.

Health

The National Health Service (NHS) has become the defining symbol of the British welfare state. The NHS was established in 1948 by the then Labour government as a universal, largely free-of-charge provision. Most of its cost is paid for from general taxation, while the rest is covered by national insurance

The National Health Service

Educational reform

18 United Kingdom


contributions (paid for by employers and employees) and by fees for certain services and drug prescription charges. In addition to the NHS, there is a private healthcare market paid for through private insurance schemes or on a self-paying basis by the patient. The private sector accounts for just under 20% of the UK healthcare market. Some 6m people (just under 10% of the population), have private medical insurance, which is often provided as a company perk.

Traditionally, the structure of the health service has imposed a clearer divide between public and private provision than in many other EU countries, but boundaries are starting to break down. The private sector is gaining rapidly in importance, partly because of impatience with waiting times in the NHS, and partly because of the growing popularity of employer-funded private health insurance. The government has signed a number of five-year contracts with private treatment centres to provide non-emergency surgery to NHS patients, and such contracts are expected to increase in the years ahead. In addition to making greater use of the private sector, the government has introduced greater competition among providers by allowing NHS patients to be treated by new, more autonomous bodies called foundation hospitals. Foundation hospitals are allowed to raise money on the open market and to negotiate local pay deals to attract staff.

The NHS has suffered from decades of underfunding, and as a consequence, the UK has fewer doctors, nurses, beds and items of diagnostic equipment per head of population, and longer waiting lists, than the EU average. International comparisons of health systems show that the UK scores poorly on a number of indicators, with a high incidence of heart attacks and cancer survival rates for a developed economy. However, life expectancy is in line with that of other developed countries, as is the infant mortality rate. One reason for this is that primary healthcare is generally good (smoking rates among men, for example, having fallen sharply). The UK has faced similar problems as other countries, with healthcare costs rising rapidly and demand for health services growing as the population ages.

Since coming to office in 1997, the Labour government has devoted huge public resources to improving the health system. Public spending on healthcare, which accounted for just 6.7% of GDP in 1997 (when the current Labour government entered office), reached 9% in 2006#the same level as the weighted average for the EU as a whole (including the UK). The huge increases in public spending have funded the construction of new hospitals, the upgrading of equipment, the recruitment of new staff and significant increases in nurses! and doctors! salaries. Waiting lists for operations have been cut, but improvements in health service outputs have not been commensurate with the scale of the increases in public spending. In addition, a number of NHS trusts have run into deficit because of financial mismanagement.

Natural resources and the environment

The UK has a temperate, maritime climate. Apart from the mountainous areas of northern Scotland, Wales and parts of northern England, much of the country is suitable for either arable or animal farming. With the exception of

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East Anglia, however, the ground is not flat enough for large-scale arable farms. Deciduous forests originally covered much of the country; some forest areas still exist and are now largely protected, but many have disappeared over the centuries, as farming has spread. The UK has the largest energy resources of any country in the EU, with significant supplies of coal, oil and natural gas. These enabled the UK to be self-sufficient in energy in net terms during the 1980s, but the UK is now turning into a net energy importer. Supplies of other minerals are limited.

Transport, communications and the Internet

The quality of the UK!s land transport infrastructure is mediocre by developed-country standards, a reflection of decades of underinvestment, particularly on the rail network. The Labour government has given higher priority to transport policy than its Conservative predecessor, but it has struggled with the legacy it inherited. A ten-year plan launched in 2000 envisaged that £180bn would be spent on transport up to 2010 (up from £95bn in the previous decade). That sum has since increased, partly because a higher share of total spending than initially planned has had to be allocated to modernising existing infrastructure rather than expanding capacity, and partly because the government underestimated the maintenance backlog on the railways.

The deficiencies of public transport have only exacerbated a secular increase in car ownership and use. Since the 1950s the number of passenger-kilometres covered annually by cars has risen exponentially, while the use of the rail system has stagnated and that of buses has consistently fallen (although owing to large subsidies, it has started rising again in the capital, London). In 2006 cars, vans and taxis accounted for 85% of passenger-kilometres travelled. One solution to tackle the resulting rise in congestion, particularly in the large urban centres, has been to introduce road pricing. Following the successful introduction of a congestion charge in London in February 2003, which reduced road traffic by 20%, road pricing is likely to be extended in other large urban centres.

The UK!s rail network is extensive, but lack of proper funding has ensured that lines are poorly maintained and commuter services, particularly in and around London, are congested, unreliable and expensive. The rail network was privatised in 1996. Since then, passenger numbers have increased, but the proportion of trains arriving on time has shown little improvement. The government!s drive to increase the amount of freight carried by the railway network has enjoyed greater success: total net tonne-kilometres stood at 22.2bn in 2005, up from just 13bn in the mid-1990s.

Following privatisation in 1996, there are over 20 franchise holders that provide rail services on the national network. The franchise holders were initially regulated by the Strategic Rail Authority (SRA), which monitored their performance and controlled their fares. However, the SRA was wound up in 2005 and its responsibilities handed to the rail operator, Network Rail. Network Rail is a not-for-profit company that was established by the government after the previous operator, Railtrack, was placed in administration in October 2001.

Land transport

The rail network

20 United Kingdom


Air travel is not an important mode of transport for domestic travel because of the short distances involved. However, several UK airports act as major international transport hubs. The largest London airport, Heathrow, is the world!s leading airport for international passenger travel, and London!s second airport, Gatwick, also ranks highly. The main national carrier, British Airways, which was privatised in 1987, is one of the world!s largest airline companies. Deregulation within the EU has made air transport more competitive, and fares have dropped dramatically. Scheduled low-cost airlines, such as EasyJet and Ryanair, which usually operate from uncongested and cheaper regional airports than those used by the established carriers, have become important players for intra-European travel. Competition on transatlantic flights will increase in 2008 when the "open skies" agreement between the EU and the US comes into force.

With competitive advantage moving to less developed countries, the UK!s shipping fleet, which was once the world!s largest, now accounts for less than 2% of the world fleet by ownership. However, London remains an important centre for ancillary maritime services such as insurance, shipbroking, law and arbitration, as well as for information and classification services.

Pressure on the capacity of many British ports has been mounting in recent years. Port operators are committed to increasing capacity, but there are concerns that British ports! difficulties in handling the volume of container traffic during unexpected peaks in demand may drive business away to ports in neighbouring countries.

The UK was one of the first EU countries to liberalise its telephone services and allow rivals to the previously state-owned monopoly, British Telecom (BT), which was privatised in two stages in 1984 and 1991. It has also been a leader in allowing cable companies to supply both television and telephony services. The network itself is entirely in private hands, and more than 100 licences have been awarded. Since BT was privatised and the sector was opened to compe-tition, overall charges are estimated to have fallen by around half in real terms, while service quality#as measured by eight OECD indicators#has improved.

The UK has one of Europe!s most competitive mobile-phone sectors, and the world!s largest mobile-phone company, Vodafone, is British. As elsewhere in the EU, the rollout of third-generation (3G) networks has proceeded more slowly than expected because of technical problems. However, all mobile operators that were awarded a 3G licence have now launched their 3G offering. GPRS (general packet radio service), the 2.5G mobile-phone service, has been available since 2002.

The UK has one of the highest rates of Internet access per head of the population outside the US and the Nordic region. In early 2006, 57% of all households could access the Internet from home. Initially, the take-up of broad-band services lagged behind many EU countries, partly because the dominant telecommunications supplier, BT, demanded high fees for its broadband services and was slow in providing unrestricted access to its local infrastructure (the "unbundling of the local loop"). However, BT cut the cost of wholesale broadband services in February 2002, encouraging a dramatic rise in take-up

Air transport

Sea transport

Telecommunications

Internet

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rates. In early 2007 broadband accounted for three-quarters of household Internet connections.

Newspaper readership is high. A feature of the UK newspaper scene is the distinction between, on the one hand, "broadsheet" daily newspapers (The Times, The Daily Telegraph, The Independent, The Guardian and the Financial Times), which, notwithstanding their often open ideological biases, adopt a serious approach to news dissemination, and, on the other, the notorious "tabloid" press (which includes The Daily Mail, The Sun, the Daily Star and The Mirror), the content of which is often prurient and xenophobic. There are also several Sunday and many local newspapers, together with a wide range of weekly and monthly magazines.

The UK has five terrestrial television channels, as well as a growing number of satellite and cable channels and a range of local and national radio programmes. Two of the terrestrial television channels and several of the cable and radio channels are run by the state-owned British Broadcasting Corporation (BBC), which is funded by licence fees. The BBC is renowned for its World Service radio, which enjoys an international reputation for unbiased and factual news reporting.

Energy provision

The natural resources available in the UK for the production of energy and essential chemicals for domestic and industrial uses are coal, oil and natural gas. Two-thirds of all electricity generated in the country comes from coal and gas and is therefore still dominated by the use of non-renewable fossil fuels. Nevertheless, there has been a growing focus on using renewable energy (an area in which research is among the most advanced in the world), with the government theoretically committed to raising the proportion of the country!s energy needs generated through renewable sources to 10% by 2010 (from just 1% in 2001). The government hopes that setting targets will boost the growth of domestic suppliers of renewable energy-generating technology. However, renewable energy sources are unlikely to meet the growth in energy demand.

The UK has extensive coal reserves. Although the industry has been in full operation since the 18th century, there are substantial reserves left. In the early 1970s coal was the main primary fuel produced, but competition from North Sea oil and gas, as well as from imports, has rendered many pits uneconomic. As a result, the production of coal has fallen sharply since the 1960s. The deregulation of the energy industry in the late 1980s was the catalyst for heavy investment in modern, efficient, gas-fired power stations, and the closure of many of the country!s older coal-fired ones led to an accelerated decline in coal production in the 1990s.

Natural gas was discovered offshore in the UK continental shelf in the North Sea in 1965, and oil was discovered in 1969; extraction commenced in 1967 and 1975 respectively. During the 1970s an extensive gas supply network was developed, allowing gas to displace coal as a source for commercial and

The media

Coal

Oil and natural gas

22 United Kingdom


domestic heating. Similarly, the construction of gas-fired power plants paved the way for gas to displace coal in electricity generation.

From having been almost wholly dependent on imported oil before 1970, the UK pumped some 2.5m barrels/day (b/d) in 1985 (the peak year of production), making it the world!s sixth-largest producer. Oil production has since fallen to around 2.1m b/d. With domestic production no longer sufficient to meet con-sumption, in 2005 the UK posted its first deficit on trade in oil in over 20 years.

The UK!s nuclear sector is not as developed as in neighbouring France. Nuclear power stations provide just over 20% of the UK!s electricity, but most are ageing. Half of the UK!s 14 nuclear power plants are due to be decommissioned by 2010, and all but one will be shut down by 2023. The government now faces the decision on whether to build a new generation of nuclear power stations. Opinion polls indicate that voters are unenthusiastic about nuclear power, but a government-commissioned review of the UK!s future energy needs concluded in 2006 that building a new generation of nuclear power stations was the only way for the government to meet growing demand for energy, while cutting greenhouse gas emissions.

The economy

Economic structure Main economic indicators, 2006 (Actual unless otherwise indicated)

Real GDP growth (%) 2.8

Consumer price inflation (av; %) 2.3

Current-account balance (US$ bn) -80.0

Exchange rate (av; £:US$) 0.54

Population (m) 60.3a

a Economist Intelligence Unit estimates.

Source: Economist Intelligence Unit, CountryData.

The UK economy is the second-largest economy in the EU after Germany and the fifth-largest in the world. Almost two-thirds of GDP in the UK is accounted for by private consumption#a higher share than in most other EU countries. The share of GDP accounted for by gross fixed investment varies according to the UK!s position in the cycle, but typically fluctuates in a range of 16-17% of GDP. The low level of investment compared with other OECD countries is often cited as one of the factors behind the UK!s poor productivity performance. The rate of overall fixed capital formation in the UK has historically been depressed by low levels of public investment. Government consumption!s share of GDP declined for much of the 1990s, bottoming out at 17.9% in 1998. Its share has since started rising, reaching 22.3% of GDP in 2006.

As in most other developed countries, the manufacturing sector accounts for a declining share of GDP. However, the fall in the UK has been more pronounced than in most other industrialised countries, and manufacturing now represents just 15% of national output. The declining share of economic activity accounted

The UK economy is the fifth-largest in the world

Nuclear power

United Kingdom 23


for by manufacturing reflects several factors. One is the long-term decline of industries such as shipbuilding and textiles, which can no longer compete with imports from countries where wage costs are lower. This factor has been exacerbated in recent years by the strength of sterling!s exchange rate, which has weakened the trade competitiveness of export-oriented manufacturers. A third factor is the trend for the contracting-out of non-core activities. Many ancillary activities once carried out in-house by manufacturing companies using their own employees#and hence recorded in the statistics as manufacturing#have been outsourced to specialist contractors and are now classified as services.

The services sector, meanwhile, has grown in importance and now accounts for more than three-quarters of GDP. In 2006 government services accounted for 23% of GDP. Of the services provided by the private sector, the most important was business services and finance, which accounted for 29.5% of GDP in 2006#a reflection of the traditional importance of the City of London as a financial centre, as well as the rapid growth of business services over the past decade. The distribution, hotel and catering sector accounts for another 15.5% of GDP. The smallest private service sector is the transport and communications sector. However, it is worth noting that the communications sector has grown rapidly over the past decade. Although its share of GDP at current prices has remained stable, this is because prices within the sector have fallen as a result of rapid productivity growth.

The construction sector, which tipped into recession in the early 1990s in the wake of sharp falls in house prices and cutbacks in government capital spending programmes, has recovered strongly since 1997 and now accounts for around 6% of GDP.

Comparative economic indicators, 2006 UKa Franceb Germany b USa Japana

GDP (US$ bn) 2,373.5 2,231.7a 2,897.1 13,244.6 4,366.6

GDP per head (US$) 39,392b 36,652 35,090 44,237 34,258

GDP per head (US$ at PPP) 34,586b 32,469 29,888 44,237 31,105

Consumer price inflation (av; %) 2.3 1.7a 1.7 a 3.2 0.2

Current-account balance (US$ bn) -80.0 -41.2 125.1 -854.7 170.8

Current-account balance (% of GDP) -3.4 -1.8 4.3 -6.5 3.9

Exports of goods fob (US$ bn) 449.35 482.6 1,119.4 1,023.5 615.1

Imports of goods fob (US$ bn) -603.33 -516.8 -917.9 -1,861.7 -533.5

a Actual. b Economist Intelligence Unit estimates.

Source: Economist Intelligence Unit, CountryData.

Economic policy

The UK has experimented with numerous frameworks for monetary policy over the past 15 years. In the 1980s the Conservative government tried in vain to target various measures of the money supply, before deciding to target the exchange rate. After "tracking" the D-mark in the late 1980s, the UK joined the EU!s exchange-rate mechanism (ERM) in October 1990, only to be ejected two years later, in September 1992, when speculative pressures forced sterling out of the ERM. Following its exit, the UK was one of the first OECD countries to

Monetary policy

24 United Kingdom


adopt inflation targeting. An inflation target range of 1-4% was initially set, but responsibility for setting interest rates remained with the government.

When the Labour government came to power in 1997, its first significant decision was to grant operational independence for setting interest rates to a newly constituted monetary policy committee (MPC) within the Bank of England (the central bank). The responsibility for setting the annual inflation target, however, remains with the government. Under the current target, the MPC must aim to keep inflation as measured by the EU!s harmonised index of consumer prices (the so-called HICP) within 1 percentage point either side of a central target of 2%. The MPC is recognised to have performed well, and the UK!s monetary policy framework is now held up as a model of transparency and accountability in international comparisons.

Important economic policy events

April 2002

The government announces that spending on the NHS will rise by 7.4% per year in real terms in 2003-08, with the increase financed largely by a rise in national insurance contributions.

June 2003

The government decides that the five self-imposed economic tests for joining economic and monetary union (EMU) have not yet been met.

April 2004

Against a backdrop of weakening public finances, the budget for 2004-05 announces the government!s intention to find £20bn (US$37bn) of "efficiency savings" by cutting civil-service numbers and streamlining procurement procedures in the public sector.

July 2004

The government!s third Comprehensive Spending Review (CSR) announces a slowdown in the rate of public expenditure growth through to 2007/08. However, the proposed increases still imply a rise in public expenditure!s share of GDP.

March 2005

The government announces a transparently pre-electoral budget with carefully targeted sweeteners for key voters.

April 2006

A government-appointed commission headed by Lord Turner publishes its report on reforming the pension system. The commission!s recommendations are broadly accepted by the government.

July 2006

A government review into the UK!s energy needs recommends the building of a new generation of nuclear reactors.

March 2007

Inflation exceeds the official target range for the first time since the Bank of England (the central bank) was granted operational responsibility for monetary policy in 1997.

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On entering office, the Labour government complemented its overhaul of the monetary policy framework with a new, medium-term framework for fiscal policy. The framework builds partly on the medium-term financial strategy (MTFS) inherited from the previous government, which defined the objective of fiscal policy as balancing the budget over the medium term.

The first plank was laid in the Labour government!s first budget in July 1997, when the chancellor of the exchequer, Gordon Brown, announced two rules that fiscal policy would aim to respect: first, that over the course of an economic cycle the government could borrow to fund capital spending, but not current spending (the "golden rule"); and second, that over the course of an economic cycle, the ratio of public debt to GDP should be held at a "stable and prudent" level. The two rules were complemented in Mr Brown!s second budget in March 1998 by a "code for fiscal stability", which the chancellor placed on a statutory footing. The code!s purpose was to improve the credibility, transparency and accountability of fiscal policy by setting out explicit provisions against which the government!s record can be judged.

The framework was completed with the publication of two further documents in June and July 1998: the Economic and Financial Strategy Report (EFSR) and the Comprehensive Spending Review (CSR). The EFSR abolished the traditional annual spending round in favour of a three-year framework for public spending (even if some categories of spending, such as social security, remain subject to annual reviews at the time of the budget). The motivation for moving to a three-year framework was to increase the Treasury!s control over public spending by reducing the influence of annual bidding rounds on budgets. The regime requires ministries to sign public-service contracts with the Treasury, which lay down detailed targets in the areas for which they are responsible and the resources they propose to allocate to them. However, successive budgets have shown that the public spending limits set out in the three-year spending framework can still be breached when the government finds it politically expedient.

Departmental spending for the three-year period is set out in the CSR, which is carried out every three years. The first CSR, covering the three-year period to 2000/01, was constrained by an electoral commitment to adhere to the two-year public spending limits put in place by the previous government. The result was that at the end of the 1999/2000 financial year, public expenditure!s share of GDP had fallen below 38%, its lowest level since the mid-1960s. The second CSR, which was announced in July 2000, faced no such constraints. It provided for an extra £43bn (US$65bn) in public spending up to the financial year ending April 2004, with particularly large increases reserved for the underfunded health, education and transport sectors. However, the increases between 2001 and 2004 only reversed the effects of the tight rein on public spending between 1997 and 1999. The third CSR, which was announced in July 2004, provided for a slowdown in the rate of public expenditure growth up to 2007/08. However, the proposed rate of growth still implied a further rise in public expenditure!s share of GDP.

Having strengthened in the late 1990s as a result of the cyclical buoyancy of tax receipts (which allowed the government to reduce government debt), the UK!s

Fiscal policy

26 United Kingdom


public finances have since deteriorated against a backdrop of sharp increases in public spending and weaker tax receipts. In 2005 the general government budget deficit reached 3.6% of GDP#the weakest outturn since 1996. The weakening of the public finances since 2001 has strained the credibility of the government!s fiscal rules.

The Labour government!s budgets have been mildly redistributive, both "vertically" (from the rich to the poor) and "horizontally" (from, for example, single households to households with children). A key feature of Mr Brown!s reforms has been the attempt to encourage people on welfare benefits back into work. The "welfare to work" programme (also known as the New Deal), initiated in 1997, requires certain categories of unemployed people, mainly the young and the long-term unemployed, to take up one of several options offered to them#such as a subsidised job with an employer or, for those without qualifications, full-time education or training#to qualify for benefit. The programme has been accompanied by changes to the tax and benefits system, which are designed to ensure that people wanting to enter the job market are not prevented from doing so by "poverty traps" (that is, earning less than they lose in withdrawn benefits).

Economic performance

Since emerging from recession in late 1992, the economy has enjoyed its longest period of expansion since records began. Since the third quarter of 1992 the UK has enjoyed 58 consecutive quarters of growth. The recovery in 1993-94 was initially export-led, but spread to the domestic components of demand in the mid-1990s and has been largely driven by them ever since. Between 1997 and 2001 real GDP grew by an annual average of 3.1% per year, well above the UK economy!s estimated long-term trend. The UK was inevitably hit by the global downturn that began in 2001, but a sharp relaxation of fiscal policy meant that the slowdown in the UK in 2002-03 was much less marked than in many other EU countries. Real GDP growth slowed from 3.3% in 2004 to 1.9% in 2005#the country!s weakest year of growth since 1992#before picking up to 2.8% in 2006.

The UK!s long period of expansion has come at the expense of growing imbalances. Between 1997 and 2004 private consumption grew consistently faster than the rate of GDP, resulting in a sharp rise in household debt (which exceeded 140% of disposable income in 2005). Debt/income ratios are now much higher than they were in the late 1980s, just before the last recession, leaving households uncomfortably exposed to rising interest rates, a downturn in the overvalued housing market or a fall in employment. On the output side, there has been a large disparity in performance between the sheltered services sector, which has grown faster than overall GDP, and the export-oriented manufacturing sector, which has dipped in and out of recession since 1998 (the result of an overvalued exchange rate in 1998-2002 and weak external demand in 2001-03). A symptom of the imbalance between the domestic and external sectors of the economy has been the sharp deterioration in the UK!s deficit on visible trade since the late 1990s.

Reforms to the tax and benefits system

Real GDP has grown strongly since 1993

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The UK economy!s long period of expansion has been accompanied by a strong rise in employment. Since the economy!s emergence from its last recession, total employment has grown by more than 3.6m. Employment trends, however, have varied widely across sectors, with the growth in employment driven primarily by the services sector. Whereas employment in the services sector has grown by 5m since 1993, the number of jobs in agriculture and the manufacturing and extractive industries has fallen. Since 1997, when the Labour government came to office, 1m jobs have been lost in the manufacturing sector. Job losses in manufacturing have been almost exactly offset by increases in public-sector employment.

In the decade to 2005, employment growth was strong enough to absorb a rise in the labour force resulting, among other things, from higher levels of female participation and higher levels of net immigration. As measured by the Labour Force Survey, which is based on International Labour Organisation definitions and is thus the best measure for international comparisons, the unemployment rate fell from a peak of 10.7% in January 1993 to just 4.7% in 2005. According to the claimant count measure, which only records jobseekers claiming unemployment-related benefits, the unemployment rate fell from a peak of 9.9% in April 2003 to 2.7% in 2005. Since 2005, however, employment growth has not been strong enough to offset the continued increase in the labour force resulting from high levels of immigration (particularly from central and eastern Europe). As a result, the rate of unemployment has edged up, reaching 5.5% at the end of 2006.

During the 1970s and much of the 1980s the UK endured persistently high inflation. Despite high levels of unemployment, wage increases in the 1980s exceeded productivity growth, provoking strong upward pressure on prices. The boom of the late 1980s created a new inflationary surge, painfully controlled only by high interest rates and the early 1990s recession. Since then, the UK!s inflation performance has improved markedly. Since the Bank of England (the UK central bank) was given operational responsibility for monetary policy in 1997, inflation has only once fallen outside the targeted range (in March 2007).

Two aspects of the UK!s recent inflation performance are worth highlighting. The first is that there has been a significant divergence since the late 1990s between goods and service-sector inflation, with the latter accounting for most of the increase in the consumer price index. By contrast, in many parts of the goods sector (notably clothing, footwear and audiovisual equipment), prices have actually declined since 2000. A second factor worth noting is the persistent strength of sterling!s trade-weighted exchange rate, which has helped to exert downward pressure on import prices.

The performance of the labour market has improved markedly in recent years, allowing unemployment to fall without provoking inflationary pressures on the wage front. Despite the gradual emergence of skills shortages, earnings across the economy as a whole grew by an annual average of just under 4% between 2002 and 2006, a rate consistent with the MPC!s inflation target (given assumptions about long-term productivity growth). Having outstripped the public sector for many years, private-sector wage growth eased in 2001-02 at a

Inflation has remained stable

Pay growth has been sustainable

Unemployment has fallen

28 United Kingdom


time when public-sector wage growth picked up (as the government strove to address the recruitment difficulties in many key public services). If bonuses are excluded, earnings growth in the public sector continued to outstrip those in the private sector in 2003-05. Only in 2006 did earnings in the private sector grow faster than those in the public sector again.

Regional trends

London and the adjacent south-east of England, which together account for over 30% of GDP, are markedly wealthier than the rest of the UK. According to data from the European statistical agency, Eurostat, the Greater London area is now comfortably the wealthiest region in the EU. However, the figure for London is overstated compared with adjacent areas because of the number of workers commuting into the capital (whose output is allocated to London, but many of whom reside outside). Income inequalities within London, moreover, are vast, and a number of the poorest boroughs in the UK are located in the capital. The wealth of London and the surrounding areas can largely be ascribed to the importance of services in the region, notably business, telecommunications and financial services, which have boomed since the second half of the 1990s.

At the other end of the scale, the poorest regions are Northern Ireland, where economic development has been hampered by political factors; Wales; and the north-east region of England, which has the highest unemployment rate in the UK. Wales and the north-east of England, where heavy industrial sectors such as coal, steel and shipbuilding used to be located, have suffered as these industries have declined.

The remaining regions, including Scotland, have levels of income per head between these two extremes. There can, however, be wide disparities within regions. Much of the south-west, for example, is quite wealthy, but the two counties in the far south-west, Devon and Cornwall, are poorer, with Cornwall a recipient of EU assistance. Similarly, the unemployment rate in Merseyside is much higher than in the rest of the north-west, and in Scotland there are marked differences between the lowland areas around Glasgow and Edinburgh and the remoter areas of the Highlands in the north and many of the islands.

Economic sectors

Agriculture

High productivity and a favourable climate ensure that the agricultural sector supplies nearly two-thirds of the country!s total food requirements. As a result of the UK!s temperate climate, there is a fairly even distribution of rainfall through the year, giving the country a long growing season, as well as enabling a wide variety of crops to be cultivated.

Even if the forestry and fishing sectors are included, agriculture accounts for less than 1% of GDP. The proportion of the labour force employed in the agricultural

Significant regional disparities still exist

An agricultural sector in crisis

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sector is just 2%, which is lower than in any other major industrial country and well below the EU average of 5%. The number of farm holdings in England and Wales has been on a downward trend since 1945, and there has been a shift to larger holdings. By EU standards, UK farms are large. The average holding is 70 ha, almost twice the size of the next-ranking countries (Luxembourg and Denmark, with just under 40 ha) and four times the EU average.

Despite its efficiency, British farming has suffered a deep-seated crisis in recent years. Not only have falling prices and an overvalued exchange rate resulted in a sharp fall in farm income, but food scares, such as BSE (bovine spongiform encephalopathy, or mad-cow disease) and the outbreak in 2001 of foot-and-mouth disease, have called into question the intensive practices on which much of UK farming is based. Anxieties about food safety, combined with concerns about the use of pesticides on crops, have led to a growing demand for organically produced food. As a result, the area of land converted to the production of organic food has risen dramatically, as has the number of organic food producers.

Woodland covers an estimated 2.8m ha, around 10% of the country!s total land area#a small proportion compared with other EU countries. Of this, 900,000 ha are managed by the Forestry Commission, the national forest authority. The sparse forest cover means that 85% of wood products are imported. However, there has been a substantial rise in forestry output over the past two decades. According to the Forestry Commission, this is expected to increase to nearly 15m cu metres by 2020.

The UK fishing industry supplies some two-thirds of the country!s requirements and is an important source of employment and income, either directly or indirectly, in a number of ports, mainly in the south-west and on the east coast. Although the industry has been adversely affected by overfishing, there is still considerable controversy over EU quotas to preserve fish stocks. As in other countries, fish farming has grown in importance. The UK accounts for over one-fifth of the EU!s farmed fish, but its share of farmed molluscs and crustaceans is small.

Mining and semi-processing

The UK is not rich in non-energy minerals, and most of the demand for industrial raw materials is met by imports. Minerals that are extracted include common sand and gravel, limestone and dolomite, clays and igneous rocks. By contrast, the UK has the largest energy resources of any country in the EU, with plentiful supplies of coal, oil and natural gas.

Manufacturing

As in most other developed countries, the manufacturing sector!s share of GDP has declined steadily, as services have grown in importance and competitive advantage in certain industries#basic steel, textiles and clothing, and shipbuilding#has moved to less developed countries with cheaper labour costs.

A declining manufacturing sector

Forestry

Fishing

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In 2006 the manufacturing sector accounted for just 13.9% of GDP, down from 15% in 2002. Several manufacturing sectors, such as the textiles industry, are in long-term decline, but the UK retains some areas of strength, notably in sectors such as electrical and optical equipment, man-made fibres and chemical products (particularly pharmaceuticals).

Over the post-war period, the UK!s trade surplus in manufactured products has gradually been eroded, disappearing altogether in the early 1980s. Since then, the UK has run a sizeable structural deficit on trade in manufactured goods. The decline of the manufacturing sector was given particular impetus by two major recessions in the early 1980s and 1990s. Both recessions were marked by large falls in capacity and employment, which were not reversed during the subsequent economic upturns. Since 1997 manufacturers have again struggled, notably as a result of the persistent strength of sterling!s trade-weighted exchange rate, which has eroded exporters! competitiveness in foreign markets. In March 2005 the UK!s last domestically owned bulk car manufacturer, Rover MG, was placed into administration.

Inward foreign direct investment (FDI) has had a major impact on the UK!s manufacturing base, with benchmarking studies suggesting that FDI has had beneficial spill-over effects on working practices, quality standards and productivity. FDI has played a decisive role in rescuing ailing industries such as the automotive sector. Japanese, US and French companies have all set up production plants in the UK, enabling the sector to experience something of a renaissance. Indeed, Nissan!s plant in Sunderland is now the most productive in Europe. In 2006 some 1.78m vehicles were produced in the UK, more than twice the number produced in 1984, making the UK the fourth-largest car producer in the EU after Germany, France and Spain. Inward FDI has also been a major factor in the strong growth of the computer software industry. Inward investors now account for one-third of business research and development (R&D) spending.

FDI inflows into the UK fell sharply during the downturn in global merger and acquisition activity in 2001-03, but have since recovered strongly. In 2005 the UK was the world!s largest recipient of FDI, attracting an inflow of £107.8bn (US$196bn). FDI inflows fell back in 2006, but still amounted to £75.8bn.

Construction

The construction sector expanded rapidly during the boom in the late 1980s, but was badly hit by the 1990-92 recession, as demand for new commercial and industrial buildings declined steeply and high interest rates and falling house prices hit the residential sector. In 1992 new housing completions fell to their lowest level since the second world war. Having been in the doldrums for much of the 1990s, the industry recovered in the latter part of the decade, driven by growth in housing demand, an upturn in investment and a number of projects associated with the celebration of the millennium. The commercial property market, particularly in London, was hit by the downturn in the advertising and financial services sectors in 2002, but has since recovered. The residential construction sector has also grown, although the UK!s strict planning

Impact of foreign direct investment

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laws have acted as a constraint on the building of new homes. Indeed, the number of residential properties built over the past five years has fallen well short of the growth in the overall population#one reason why prices in the residential sector have climbed so steeply. In 2006 the construction sector accounted for 6% of GDP.

Financial services

London, along with New York and Tokyo, is one of the world!s three largest financial centres, with a dominant position in several international financial markets, including crossborder bank lending, international bond issuance and trading, foreign-exchange trading, over-the-counter derivatives, foreign equities trading and fund management. It also boasts the world!s largest insurance market, the leading exchange for dealing in non-precious metals, the largest spot gold and gold lending markets, the largest shipbroking market, and more foreign banks and investment houses than any other major international financial centre. In 2006 some 450 foreign banks had physical presences in London, more than twice as many as in the next-largest international financial centres, Frankfurt and New York. The UK!s decision to stay outside economic and monetary union at launch has not provoked business to migrate away from London towards centres in the euro area. Indeed, London enjoys a critical mass in terms of institutions, human capital and professional services, which has allowed it to maintain its position as Europe!s dominant financial centre.

The London Stock Exchange (LSE) is the world!s third-largest stockmarket after New York and Tokyo and is comfortably the largest bourse in the EU. However, the LSE has suffered from poor leadership and antiquated practices and has failed to play a part in the crossborder consolidation of EU stock exchanges. The LSE suffered a setback in 2001, when it lost out to Euronext (a company formed from the merger of the Paris, Amsterdam and Brussels bourses) in a bid to acquire the London International Financial Futures and Options Exchange (LIFFE). This did not end up damaging London!s status as Europe!s premier financial centre, not least because the headquarters of Euronext!s futures and options business was subsequently moved to London. However, the LSE has been the target of numerous foreign takeover bids in recent years, which it has so far rebuffed.

The market for retail deposits and lending to UK households is dominated by domestic institutions. The retail banking sector has experienced widespread consolidation over the past decade. A number of building societies#mutuals that take deposits from the public and lend in the retail mortgage market#have converted to bank status. Institutions have merged or been taken over, with prominent tie-ups including the purchases of the Trustee Savings Bank and Cheltenham & Gloucester by Lloyds; of Halifax by the Bank of Scotland (to form HBOS); of Woolwich by Barclays; and of NatWest by the Royal Bank of Scotland. Banks have also tried to increase cost efficiencies by reducing their branch networks. This process has been accompanied by a sharp rise in the number of automated teller machines.

London is a leading financial centre

The stockmarket

Retail banking

32 United Kingdom


Although the Internet has lowered barriers to entry, deposit-taking and lending activity is still dominated by ten banking groups: Abbey, Alliance & Leicester, Barclays, Bradford & Bingley, HSBC Holdings, HBOS, Lloyds TSB, Northern Rock, RBS Group and Standard Chartered. Despite the entry into force in 1993 of the EU!s second banking co-ordination directive, which allows banks incorporated in other EU member states to open branches and provide services in the host country on the basis of a single authorisation from the home state, few foreign entrants have made any inroads into the UK retail market. Among the few that have tried are ING, a Dutch bank, and Banco Santander of Spain, which gained a foothold by acquiring Abbey in 2004.

Since 1999, responsibility for supervising credit institutions (as well as insurance companies and securities firms) has rested with the Financial Supervisory Authority (FSA). Despite two high-profile regulatory failures over the past 15 years#the belated closure of the fraudulent Bank of Credit and Commerce International in 1991 and the collapse of Barings in 1995#the UK!s regulatory system is still held in high regard abroad. The UK is one of the most influential members of the G10, which develops international standards on financial supervision, and its regulatory environment complies with the Basel mini-mum standards.

The UK insurance market is the largest in Europe and the third-largest in the world after the US and Japan. The UK insurance sector caters for more than just the domestic market. A key constituent of the insurance sector is the London Market, a unique wholesale market that accepts risk from around the world and is the world!s leading centre for large risks (such as aviation, shipping and oil and gas rigs) and re-insurance. Three-quarters of the companies on the London Market are foreign-owned, and just over half of all business on the London Market is accounted for by Lloyd!s of London (an insurance market that should not be confused with the retail bank).

Other services

The UK has a generally efficient retail and wholesale distribution system, particularly in the supply of food and household goods in supermarkets. Competition between supermarkets has increased in recent years, but profit margins have remained quite high. Major supermarket chains have widened their offer of online shopping and improved their services, positioning the UK as one of the most advanced countries in Europe in the e-business sector. In value terms, just over half of total retail sales are now accounted for by "pre-dominantly non-food stores". In practice, spending on non-food items is even higher than this share suggests, as a rising number of non-food items# books, consumer electronics, compact discs and so on#are sold through supermarkets.

The country!s most successful retailer in recent years has been a supermarket, Tesco, which has transformed itself into the world!s third-largest retailer. In addition to growing its share of the domestic food market to almost 30%, Tesco has increased its share of the domestic non-food sector to 5%. Tesco!s success has placed a number of players under growing pressure. The UK!s second-

Banking sector supervision

Retailing

Insurance

United Kingdom 33


largest retailer is Asda, which was acquired by Wal Mart of the US in 1999. Like Tesco, Asda still generates most of its sales from food, but it has experienced strong growth in the non-food sector. Two venerable British retailers that have struggled in this increasingly competitive environment are Marks & Spencer and Sainsbury!s. However, both groups enjoyed an upturn in their fortunes in 2006.

The UK has a flourishing business services sector, partly reflecting synergies with the financial sector in London. The capital is a leading centre for law, consultancy and advertising, which contribute significantly to the country!s overseas earnings. Growth has also been boosted by the increasing importance of information technology and the growing tendency of companies to contract out non-core services.

The UK is the world!s fifth-largest earner from international tourism after the US, Spain, France and Italy. The industry as a whole employs 2.1m people and accounts for almost 5% of GDP. Having grown steadily through the 1990s, the tourism industry plateaued in 1999-2000, before being hit by two major shocks in 2001: the outbreak of foot-and-mouth disease in British cattle (which hit rural tourism particularly hard) and a sharp fall in arrivals from the US in the wake of the terrorist attacks on the US on September 11th 2001. The number of tourist arrivals dipped from a peak of 25.7m in 1999 to 22.8m in 2001, provoking a decline in tourism receipts from US$20.2bn to US$16.3bn over the same period. However, visitor numbers and receipts have recovered since 2002. Despite a major terrorist attack on London!s transport network in July, the UK attracted 30m visitors in 2005. Visitor numbers rose further in 2006, reaching 32.1m#an all-time high.

London is by far the most popular destination for foreign tourists coming to the UK, with over half of all visitors to the country spending at least one night in the city. The number of hotel rooms in London has increased considerably in recent years as a result of heavy investment in new capacity, but much of this has been concentrated in the most expensive class of hotel, and there continues to be an acute shortage of affordable accommodation. Restaurant standards, once mediocre, have generally improved, particularly in London, which is now acquiring a reputation as an innovative gastronomic centre. London!s pull, however, makes life hard for local tourist boards outside the capital, notably in Scotland and Wales.

The arts are an important element in tourism and in the economy as a whole. The country has a lively theatre and musical sector, as well as many museums and art galleries. Television and radio broadcasting are widely considered another strength, but the film industry has had a chequered history and has found it difficult to acquire domestic funding. The arts contribute significantly to employment and, via royalty earnings, to the UK!s balance of payments.

Business services

Tourism

The arts

34 United Kingdom


The external sector

Trade in goods

With certain rare exceptions (notably in 1980-82, when a rise in the price of oil resulted in a sharp increase in export earnings), the UK runs a deficit on visible trade. Currently, the UK is a net importer of foodstuffs and raw materials, as well as of clothing and footwear, electrical machinery and motor vehicles (despite the presence in the UK of several foreign-owned car plants, which export a major share of their production to the rest of the EU). The UK is a net exporter of chemicals products (particularly pharmaceuticals), tobacco, beverages (notably whisky) and mechanical machinery. The deficit on trade in goods has deteriorated markedly in recent years, rising from £12.3bn in 1997 to £83.7bn (US$154bn) in 2006. This partly reflects the country!s mediocre export performance#the UK!s share of world exports declined from 4.3% in 2002 to 3.6% in 2006. However, it also reflects a sharp increase in the import bill#a result of strong domestic demand and rises in the price of imported raw materials (particularly oil, of which the UK is now a net importer). Measured as a share of GDP, the UK!s deficit on trade in goods amounted to 6.5% in 2006, an all-time high.

The UK!s largest trading partner by far is the EU. In 2006 the EU27 accounted for 62.8% of the UK!s export earnings and for 58.2% of the UK!s import bill. Within the EU, the UK!s largest export markets are (in descending order) Germany, France, Ireland and the Netherlands. However, the UK!s largest single market is the US, which accounted for 13.1% of visible export earnings in 2006. The UK!s single largest supplier is traditionally Germany, followed by the US. In 2006 France supplanted Germany as the UK!s largest supplier, but bilateral trade with France was distorted by a surge in fraud related to value-added tax.

Invisibles and the current account

The UK consistently runs a surplus on invisible transactions. As with merchandise trade, the invisibles balance can be volatile, but it has tended to move within a smaller range. The surplus on the services balance is substantial, totalling £29.6bn in 2006. The UK does run deficits in certain sectors, notably transport, travel and government transactions, and these have widened in recent years because of the strength of sterling. However, such deficits are easily outweighed by the surpluses from insurance, finance and business services. The balance on investment income is particularly volatile, but it has risen from a surplus of £1.3bn in 1999 to a surplus of £22.8bn in 2006. This reflects higher net income from UK portfolio investments abroad and a decline in foreigners! earnings from investments in the UK. The UK runs a persistent deficit on transfers, a reflection of its net payments to the EU budget and of overseas aid.

Large as it is, the UK!s invisibles surplus is usually outweighed by the country!s deficit on trade in goods, resulting in a current-account deficit. Since 2002 the rise in the deficit on trade in goods has been responsible for pushing the

The trade balance is persistently in deficit

Main trading partners

The UK runs an invisibles surplus

The current-account deficit has widened since 2002

United Kingdom 35


current account deep into the red. In 2006 the UK!s current-account deficit totalled £43.4bn, or 3.4% of GDP.

Capital flows and foreign debt

The UK has always been an important source of capital exports#both direct and portfolio investment#and these became more significant with the advent of North Sea oil and the abolition of exchange controls in 1979. In the second half of the 1980s foreign direct investment (FDI) outflows were substantial and comparable with those of the US. FDI outflows fell sharply during the recession of the early 1990s, but picked up again from 1993 onwards, reaching a record level of £162bn (US$245bn) in 2000, before dropping back in 2001-03 in the wake of the bursting of the technology-related investment bubble. FDI outflows have since picked up again, but not as strongly as FDI inflows. Indeed, the UK, which is usually a net exporter of direct investment, was a net importer in 2005 and 2006. The last time this had happened in was in 1990.

Portfolio investment flows#both into and out of the UK#are erratic, depending as they do on interest rate differentials, stockmarket valuations and risk appetite in financial markets. However, the UK!s holdings of overseas assets and foreigners! holdings of UK assets have both grown substantially in recent years. At the end of 2006 UK portfolio investment abroad totalled £1.56trn, while portfolio investments in the UK by overseas residents reached £1.62trn.

Since the UK runs a current-account deficit and net overseas direct investment and portfolio investment flows are normally outward, the balance needs to be financed. Two elements are crucial in this. First, UK residents normally undertake more bank and other borrowing from abroad than overseas residents borrow from the UK. As a result, the UK always has a net negative position on lending and borrowing, channelled via UK banks and by other means. Outflows of interest on these holdings exceed inflows. Second, since UK investments overseas, both direct and portfolio, exceed foreign investment in the UK, net capital gains on these investments are also usually positive.

Foreign reserves and the exchange rate

The UK!s reserves are almost entirely composed of gold and foreign exchange. Holdings of gold were valued at US$6.3bn at the end of 2006. The UK govern-ment!s holdings of gold have been reduced in recent years, and some of the remaining holdings have been deposited with the European Central Bank. At end-2006 total foreign-exchange reserves (excluding gold) were US$40.7bn.

As trade with the EU has grown, the main rate of exchange in the past 20 years has come to be that against the D-mark (and since 1999 the euro) rather than the US dollar. In recent years sterling has tended to trade in an intermediate range between the euro and the US dollar. Sterling rose against the euro after the latter!s launch, albeit less strongly than the US dollar, and strengthened against the US dollar between 2002 and 2006, although less strongly than the euro.

Inward and outward direct investment

Portfolio investment

Foreign-exchange reserves

Sterling's exchange rate

Financing the current-account deficit

36 United Kingdom


Regional overview

Membership of organisations

Since January 1st 2007 the EU has comprised 27 member states: Austria, Belgium, Bulgaria, the Czech Republic, Cyprus, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the UK.

According to the 1992 Treaty on European Union, the European Community (EC) forms the first of the three pillars that make up the EU, along with the Common Foreign and Security Policy (CFSP) and co-operation in the field of Justice and Home Affairs (JHA).

The European Coal and Steel Community (ECSC) was set up by the Treaty of Paris, signed on April 18th 1951, to pool the coal, iron and steel resources of the six original member states: Belgium, France, the Federal Republic of Germany, Italy, Luxembourg and the Netherlands. In March 1957 these states signed the Treaty of Rome, establishing the European Economic Community (EEC). Its immediate aims were to achieve a customs union and common market in goods and services. The European Atomic Energy Community (Euratom), was set up at the same time to develop the peaceful use of nuclear energy. The 1987 Single European Act (SEA) sanctioned qualified majority voting (QMV) for directives and regulations to liberalise the movement of goods, services, capital and people.

The Treaty on European Union (Treaty of Maastricht) established the EU in its present form, and committed its members, with the exception of the UK and Denmark, to economic and monetary union (EMU). It came into effect in November 1993. The Treaty of Amsterdam, which took effect in May 1999, incorporated the Schengen agreement to abolish frontiers between all member states other than the UK and Ireland. The Treaty of Nice, signed in February 2001 and taking effect in February 2003, dealt mainly with two issues linked to prospective enlargement: the number of commissioners and the reweighting of votes.

In October 2004 the EU heads of government signed a proposed new constitutional treaty which, if ratified, would have replaced all the above treaties. However, it was defeated in two referendums, in France on May 29th 2005 and in the Netherlands on June 1st. Although 18 of the 27 countries have ratified it, the obstacles to ratification in the other countries are insurmountable as far as the constitutional treaty in its present form is concerned. Debate has been ongoing but without agreement on how much of the treaty reforms, which are considered desirable by most member state governments, can be incorporated into any new treaty reform which would have a reasonable chance of being ratified by all member states.

The framework

The treaties

European Union

United Kingdom 37


The European Council is the regular meeting of heads of state or government and the president of the Commission; it takes place three to four times a year. It has no direct legislative powers but sets the guidelines for policy.

The Commission consists of a college of 25 commissioners#one from each member state#and a civil service of about 23,000. The Commission has sole responsibility for drafting legislation, but its drafts can be amended by the Council of Ministers and Parliament. It is responsible for administering a budget, limited to 1.24% of EU gross national income (GNI) and currently amounting to about 1% of GNI.

The Council of Ministers directly represents the member governments. On some issues the Council functions as an executive, on others it functions as one branch of the legislature, the other being the European Parliament. The parliament has 732 members, and is directly elected for a five-year term. It has powers of co-decision with the Council on most legislation that is voted on by QMV. It must also ratify all external agreements.

The European Court of Justice consists of 25 judges, one from each member state, who decide whether acts of the Commission, the Council, member governments and other bodies are compatible with the treaties. The European Court of Auditors has recently stepped up its role as a severe critic of financial management.

In January 1999 11 member states#Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain#formed an economic and monetary union (EMU), with the euro as a single currency and a common monetary policy conducted by the European Central Bank (ECB). Greece joined EMU in 2001; Denmark rejected EMU membership in a referendum in 2000, as did Sweden in 2003, while the UK is keeping its options open. All ten new member states are committed to joining EMU. Slovenia was the first to do so at the start of 2007.

In addition to the six original members of the EC, Denmark, Ireland and the UK joined in January 1973; Greece in January 1981; and Portugal and Spain in January 1986. In 1993, a set of criteria known as the Copenhagen criteria for future membership was set out by the heads of government. Austria, Finland and Sweden became members of what was by then the EU in January 1995. In May 2004 Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia joined the EU. Bulgaria and Romania joined in January 2007. Any future enlargements require a minimal treaty reform on the number and country allocation of commissioners.

Negotiations with Croatia opened in October 2005 after a delay, which had been the result of concerns within the EU that Croatia was not fully complying with its obligations to the International Criminal Tribunal for former Yugoslavia (ICTY) in The Hague. Turkey was given full candidate status at the Helsinki European Council of December 1999. Negotiations with Turkey formally opened on October 3rd 2005, but these have been deemed "open-ended" with no guarantee of membership even if Turkey were to meet all the criteria. There is strong opposition to membership in some member states but support in

Economic and monetary union (EMU)

Enlargement

Institutions

38 United Kingdom


others. Progress in Turkey!s negotiations is likely to be slow and its earliest possible date for actual accession is 2015.

In June 1999 the EU launched the Stability and Association Process for south-eastern Europe#Albania, Bosnia and Hercegovina, Croatia, Macedonia and Serbia and Montenegro. This provides for the negotiation of bilateral Stability and Association Agreements as a first step towards these countries! eventual accession into the EU. It is broadly accepted that these countries have a right to membership if they meet the criteria.

There are partnership and co-operation agreements (PCAs) in force with all former Soviet countries except Belarus and Turkmenistan. In May 2004 the European Commission adopted a strategy paper outlining the scope and objectives of a new European Neighbourhood Policy (ENP), aimed at strengthening ties with those countries that form the borders of the newly enlarged EU#although Russia has been excluded at its own request. The ENP encompasses the previously existing Mediterranean policy.

In April 1949, as post-war relations between the West and the Soviet Union worsened, ten west European countries#Belgium, Denmark, France, the UK, Iceland, Italy, Luxembourg, the Netherlands, Norway and Portugal#plus the US and Canada formed the North Atlantic Treaty Organisation (NATO), a political and military alliance with a commitment to mutual defence in the event of attack against any of its members (Article 5 of the North Atlantic Treaty).

Since its establishment the Alliance, which now has its headquarters in Brussels, has been expanded five times, bringing the current number of members to 26. In 1952 Turkey and Greece joined; in 1955 West Germany and in 1982 Spain. In 1999, after the collapse of the Soviet Union, NATO admitted three central and east European countries, Poland, Hungary and the Czech Republic. In November 2002 seven more#Bulgaria, Estonia, Latvia, Lithuania, Romania, Slovakia and Slovenia#were invited to join and their accession took place at the end of March 2004. The Alliance is open to further expansion.

After the end of the Cold War at the end of the 1980s the Alliance had to undergo a major transformation to justify its continued existence. From being an alliance between countries with a common enemy, it increasingly focused on international crisis management and peacekeeping. In 1994 NATO established a Partnership for Peace programme with other countries intended to foster co-operation with non-member states.

In the post-cold war period NATO has undertaken several controversial military operations in the Balkans, particularly air strikes in Bosnia in 1995 and against Yugoslavia over Kosovo in 1999. The 1999 air strikes were carried out without UN approval. In the aftermath of both conflicts NATO was been heavily involved in peacekeeping in Bosnia and Kosovo and Macedonia (Bosnia and Macedonia have been transferred to the EU, still using NATO assets).

Following the September 11th 2001 terrorist attacks on the US the then NATO secretary general, George Robertson, invoked Article 5 of the North Atlantic Treaty. The US did not involve NATO in the US-led military campaign in Afghanistan which followed, but NATO has been in charge of the management

NATO

The ENP

Stability and Association Process

United Kingdom 39


of the International Security and Assistance Force (ISAF) since August 2003. NATO countries were sharply divided over the US-led attack on Iraq in March-April 2003.

Established in 1972, the Conference for Security and Co-operation in Europe (CSCE) was initially a non-institutionalised multilateral forum for East-West dialogue, and served for almost 20 years as a convenient and flexible arrangement for easing cold war tensions. The organisation gradually expanded in aim and strengthened its organisational structure in the 1990s. After the end of the cold war the role of the body started to change quickly, and in December 1994 the conference was officially renamed the Organisation for Security and Co-operation in Europe (OSCE). With 55 member states, the OSCE is the only inclusive pan-European security organisation. Canada and the US are also members of the organisation.

The OSCE has played a major role in conflict prevention and resolution, as well as post-conflict reconstruction in Europe. Its activities embrace three dimensions: security, economy and human rights. The OSCE is engaged in preventive diplomacy, arms control and confidence-building activities. It undertakes fact-finding and conciliation missions, and carries out crisis management. The organisation is a component of the European security architecture. It is a "regional arrangement" in the sense of Chapter VIII of the UN Charter, which gives it the authority to try to resolve a conflict in the region itself, before referring it to the UN Security Council. Since the early 1990s the OSCE has been heavily involved in the Balkans and the Transcaucasus.

The activities of the OSCE are performed by a web of specialised agencies. The High Commissioner on National Minorities, based in The Hague, is the primary source of "early warning", with responsibility for identifying ethnic tensions that might endanger peace. The Office for Democratic Institutions and Human Rights (ODIHR), based in Warsaw, focuses on promoting human rights, democracy and the rule of law. It monitors elections, assists in developing national electoral and legal institutions, promotes the development of non-governmental organisations (NGOs) and civil society, and conducts meetings, seminars and special projects. The Office of the Representative on Freedom of the Media, based in Vienna, assesses the implementation of the member states! commitments concerning freedom of journalism, broadcasting and access to information.

OSCE

40 United Kingdom


Appendices

Sources of information

Bank of England, Monetary and Financial Statistics (monthly), London

National Institute of Economic and Social Research, National Institute Economic Review, (quarterly), London

Office for National Statistics, Annual Abstract of Statistics, London

Office for National Statistics, Economic Trends (monthly), London

Office for National Statistics, Financial Statistics (monthly), London

Office for National Statistics, Labour Market Trends (formerly Department of Employment Gazette) (monthly), London

Office for National Statistics, Monthly Digest of Statistics, London

Office for National Statistics, Social Trends (annual), London

Office for National Statistics, United Kingdom Balance of Payments (annual), London

Office for National Statistics, United Kingdom National Accounts (annual), London

Note. The Office for National Statistics was the Central Statistical Office until April 1996. Its occasional press releases are referred to as First Release.

Newspapers: the best source of business and financial news is undoubtedly the Financial Times, which has extensive domestic, European and foreign general news coverage. The other broadsheet newspapers, including The Daily Telegraph, The Guardian, The Independent and The Times, cover business and economic news to a lesser extent. The Sunday editions of most of these papers usually contain reviews and deeper analysis of the week!s domestic news.

The IMF and the OECD are the major international providers of statistical information on the UK economy. Eurostat publications can also be useful.

IMF, International Financial Statistics (monthly)

OECD, Economic Survey (annual)

OECD, Main Economic Indicators (monthly)

David Butler and Gareth Butler, British Political Facts, 1900-94, Macmillan, London. A useful guide to understanding UK politics this century.

Tony Buxton, Paul Chapman and Paul Temple (eds), Britain's Economic Performance, Routledge, London, 1994. Aimed more at the economist than the layman, this book examines different aspects of the UK!s recent economic record.

National statistical sources

International sources

Select bibliography

United Kingdom 41


Commission on Public Policy and British Business, Promoting Prosperity: A Business Agenda for Britain, Vintage, London, 1997. A comprehensive and balanced overview of the strengths and weaknesses of UK business and economic policy.

Will Hutton, The State We're In, Jonathan Cape, London, 1995. A readable, if sometimes tendentious, examination of the sources of the UK!s economic problems and social divisions.

John L Irwin, Modern Britain, An Introduction, 3rd edition, Routledge, London, 1994. A good general overview of British life.

Christopher Johnson and Simon Briscoe, Measuring the Economy, Penguin, Harmondsworth, 1995. A good guide for understanding UK economic statistics and following developments in the UK economy.

David Marquand and Anthony Seldon (eds), The Ideas that Shaped Post-war Britain, Fontana, London, 1996. A selection of essays on the genesis and development of the political, economic and social ideas that have shaped and reshaped Britain over the past 50 years.

Office for National Statistics, Britain 1999: The Official Handbook of the United Kingdom, The Stationery Office, Norwich. Updated each year, this is an official but balanced and comprehensive guide to the UK.

Anthony Seldon (ed), The Blair Effect, Little Brown, London, 2001. A collection of thoughtful essays covering various aspects of Mr Blair!s first term in office. Perhaps the best work to have appeared on the current Labour government to date.

Philip Stephens, Tony Blair: The Making of a World Leader, Politico!s Publishing, London 2004. A readable biography of the UK!s prime minister published in the wake of his controversial decision to support the US-led war on Iraq.

Note. The Stationery Office publishes many works of interest in this context. It was known as HMSO until September 1996.

www.statistics.gov.uk is the website of the Office for National Statistics (ONS). It includes all the latest data releases, as well as a useful archive.

www.bankofengland.co.uk is the official website of the Bank of England (the central bank). A good source for monetary and financial statistics, the minutes of monetary policy committee meetings and the texts of recent speeches by senior officials.

www.hm-treasury.gov.uk is the official website of the Treasury. Good for background on recent policy announcements, and particularly useful for information on annual budgets.

www.fco.gov.uk is the official website of the Foreign and Commonwealth Office. Provides background on British foreign policy and copies of recent speeches by ministers.

Useful websites

42 United Kingdom


www.tradeinvest.gov.uk is the official website of UK Trade & Investment, which promotes the UK as a site for foreign investors. An essential port of call for firms wanting to establish operations in the UK.

www.gksoft.com/govt/en/gb.html is a compendium of all government agency websites in the UK.

www.europa.eu.int provides information on the EU!s key institutions, as well as official EU documents and statistics.

Reference tables Population (mid-year estimates; '000 unless otherwise indicated)

2001 2002 2003 2004 2005Males 28,810 28,914 29,108 29,271 29,479

Females 30,241 30,318 30,446 30,563 30,730Total 59,051 59,232 59,554 59,834 60,209 % change 0.7 0.3 0.5 0.5 0.6

Source: National Statistics, Monthly Digest of Statistics.

Transport statistics 2002 2003 2004 2005 2006Road New vehicle registrations ('000) 3,229.5 3,231.9 3,185.3 3,021.4 2,913.6Private cars 2,682.1 2,646.0 2,599.0 2,443.5 2,340.0Vehicles licensed (year-end; '000) 30,557 31,207 32,259 32,897 n/aPrivate cars 24,543 24,985 25,754 26,208 n/aVehicle-km travelled (index

1995=100) 113 115 n/a n/a n/aGoods transport tonne-km (index

1995=100)a 104 106 106 106 n/aRail Passenger-km (m) 39,141 39,678 40,911 41,762 43,211Freight lifted (m tonne) 87.5 89.3 98.7 102.8 n/aAir Aircraft-km flown ('000) 1,047,400 1,082,392 1,204,698 1,324,222 1,400,167Passengers uplifted ('000) 72,709 76,207 86,049 93,603 97,543Cargo uplifted (tonnes) 769,519 799,406 905,622 921,406 946,267


National energy statistics 2002 2003 2004 2005 2006Natural gas production

('000 gigawatt hours) 1,204.7 1,196.1 1,115.7 1,017.8 923.5Crude oil production (m tonnes) 107.4 97.8 87.5 77.2 69.9Coal production ('000 tonnes) 29,989 28,279 25,096 20,498 18,588

Electricity generated (twh) 350.8 356.4 357.8 361.3 360.9


United Kingdom 43


Gross domestic product (market prices)

2002 2003 2004 2005 2006

Total (US$ bn) At current prices 1,571.8 1,812.8 2,154.1 2,229.1 2,373.5

Total (£ bn) At current prices 1,048.8 1,110.3 1,176.5 1,226.0 1,290.0

At constant (2003) prices 1,081.5 1,110.3 1,146.5 1,168.7 1,201.0

% change, year on year 2.1 2.7 3.3 1.9 2.8

Per head (£) At current prices 17,679 18,644 19,679 20,425 21,409

At constant (2003) prices 18,231 18,644 19,177 19,470 19,931


Sources: National Statistics, United Kingdom National Accounts; Economist Intelligence Unit.

Nominal gross domestic product by expenditure (£ bn at current prices where series are indicated; otherwise % of total)

2002 2003 2004 2005 2006

Private consumption 690.5 724.3 761.5 791.6 826.6

65.8 65.2 64.7 64.6 64.1

Government consumption 212.5 232.7 250.7 269.5 287.6

20.3 21.0 21.3 22.0 22.3

Gross fixed investment 173.5 178.8 194.5 205.9 223.7

16.5 16.1 16.5 16.8 17.3

Stockbuilding 3.1 3.9 4.8 3.7 5.6

0.3 0.4 0.4 0.3 0.4

Exports of goods & services 276.5 285.4 298.7 325.9 370.1

26.4 25.7 25.4 26.6 28.7

Imports of goods & services 307.4 314.8 333.7 370.4 424.2

29.3 28.4 28.4 30.2 32.9

GDP 1,048.8 1,110.3 1,176.5 1,226.0 1,290.0

Source: National Statistics, United Kingdom National Accounts.

Real gross domestic product by expenditure (£ bn at constant 2003 prices where series are indicated; otherwise % change year on year)

2002 2003 2004 2005 2006

Private consumption 704.0 724.3 748.8 759.4 774.8

3.5 2.9 3.4 1.4 2.0

Government consumption 224.9 232.7 240.1 247.4 253.2

3.5 3.5 3.2 3.0 2.4

Gross fixed investment 178.1 178.8 189.5 195.1 207.7

3.7 0.4 6.0 3.0 6.5

Stockbuilding 2.5 3.9 4.6 3.3 5.6

-0.3a 0.1a 0.1 a -0.1a 0.2a

Exports of goods & services 280.6 285.4 299.3 322.9 360.4

1.0 1.7 4.9 7.9 11.6

Imports of goods & services 308.7 314.8 335.7 359.1 401.3

4.8 2.0 6.6 7.0 11.8

GDP 1081.5 1110.3 1146.5 1168.7 1201.0

2.1 2.7 3.3 1.9 2.8

a Change as a percentage of GDP in the previous year.

Source: National Statistics, United Kingdom National Accounts.

44 United Kingdom


Money supply (£ bn unless otherwise indicated; end-period)

2002 2003 2004 2005 2006

Money (M1) incl others 39.5 42.3 44.5 47.1 50.5


Money (M4) 1,008.8 1,081.3 1,179.2 1,328.3 1,497.2


Source: IMF, International Financial Statistics.

Interest rates (%; period averages unless otherwise indicated)

2002 2003 2004 2005 2006

Lending interest rate (%) 4.0 3.8 4.8 4.5 5.0

Deposit interest rate (%) 3.0 2.5 3.0 3.2 3.3

Money-market interest rate (%) 4.1 3.7 4.6 4.8 4.8

Long-term bond yield (%) 4.9 4.5 4.9 4.4 4.6

Source: IMF, International Financial Statistics; National Statistics, Financial Statistics.

Central government financesa (£ m unless otherwise indicated)

2002/03 2003/04 2004/05 2005/06 2006/07Current receipts 371,583 394,683 422,050 452,162 482,213 Taxes on production 139,640 148,534 154,755 159,105 168,797 Value-added tax 69,081 76,627 79,960 81,445 86,425 Taxes on wealth & income 143,238 145,488 160,979 180,292 194,714 Income & capital gains tax 112,373 115,233 124,977 135,271 146,985 Other 30,865 30,255 36,002 45,021 47,729 Other taxes 9,538 10,172 10,798 11,586 12,129 Compulsory social contributions 63,529 75,148 80,209 85,404 90,463 Interest & dividends 7,998 7,847 7,485 7,709 7,782 Other receipts 7,640 7,494 7,824 8,066 8,328

Current expenditure 374,737 406,586 433,639 460,328 484,448 Interest 20,942 22,333 23,971 25,804 27,500 Net social benefits 108,950 116,857 122,252 128,354 132,290 Other 244,845 267,396 287,416 306,170 324,658Saving, gross plus capital taxes -3,154 -11,903 -11,589 -8,166 -2,235

Depreciation 5,287 5,524 5,782 6,119 6,564Current budget -8,441 -17,427 -17,371 -14,285 -8,799Net investment 16,363 18,543 20,049 18,537 25,788

Net lending or borrowing (current saving less capital spending) 24,804 35,970 37,420 32,822 34,587

a Data on a UK basis differ slightly from those on a Maastricht basis.

Source: National Statistics, First Release.

United Kingdom 45


Public-sector net cash requirement (£ m unless otherwise indicated)

2002 2003 2004 2005 2006Central government 17,361 37,615 43,193 40,416 39,600 Own account 18,704 41,925 42,152 37,992 37,489Local government -2,283 -3,711 -831 3,878 -796 From central government -1,685 -3,943 760 2,568 2,466 From other -598 232 -1,591 1,310 -3,262

General government 16,763 37,847 41,602 41,726 36,338 % of GDP 1.2 2.7 2.8 2.7 2.3Public corporations 2,889 307 1,003 -919 -3,638 From central government 342 -367 281 -144 -355 From other 2,547 674 722 -775 -3,283Total public sector 19,310 38,521 42,324 40,951 33,055 % of GDP 1.4 2.7 2.9 2.7 2.1


Government deficit and debt under the Maastricht treaty 2002 2003 2004 2005 2006General government financial balance (£ bn) -15.8 -35.7 -37.6 -43.7 -35.4 % of GDP -1.5 -3.2 -3.2 -3.6 -2.7General government year-end gross debt (£ bn) 400.3 438.7 482.8 525.9 571.8 % of GDP 37.7 39.0 40.8 42.8 43.5


Prices and earnings (% change, year on year)

2002 2003 2004 2005 2006

Consumer prices (av) 1.3 1.4 1.3 2.0 2.3

Average nominal wages 3.5 3.4 4.5 4.0 4.1

Average real wages 2.3 2.0 3.1 1.9 1.8

Unit labour costs 6.2 11.4 14.2 3.0 4.2

Sources: National Statistics, Monthly Digest of Statistics; Economist Intelligence Unit.

Registered unemploymenta 2002 2003 2004 2005 2006Claimant count ('000) 946.7 933.1 853.3 861.7 944.7Unemployment rate (%) 3.1 3.0 2.7 2.7 3.0

a National definitions, those claiming unemployment-related benefits.


46 United Kingdom


Retail sales (indices with 2000=100 where series are indicated; otherwise % change year on year)

2002 2003 2004 2005 2006Value, all retailers 110.6 113.7 118.8 119.9 123.4 4.4 2.8 4.5 0.9 2.9Volume, all retailers 112.2 116.3 123.3 125.8 129.9 5.7 3.7 6.0 2.0) 3.3 Mostly food stores 108.2 111.9 116.5 119.7 122.7 4.2) 3.4 4.1 2.7) 2.5 Mostly non-food stores 115.5 121.1 129.6 131.9 136.6 7.1 4.8 7.0 1.8 3.6


Agricultural production 2002 2003 2004 2005 2006Production ('000 tonnes) Wheat 15,973 14,282 15,468 14,863 14,735Barley 6,128 6,360 5,799 5,495 5,239Sugarbeet 9,559 9,168 8,850 n/a n/aPotatoes 6,966 5,918 6,316 n/a n/aLivestock ('000; mid-year) Cattle & calves 10,345 10,508 10,588 10,392 10,270Sheep & lambs 35,834 35,812 35,817 35,416 34,722Pigs 5,588 5,046 5,159 4,862 4,933


Industrial production (2003=100 unless otherwise indicated)

2002 2003 2004 2005 2006Mining & quarrying 105.4 100.0 92.1 83.4 76.8Food, drink & tobacco 100.0 100.0 101.6 102.3 102.1

Textiles, leather & clothing 101.8 100.0 90.1 88.1 85.2Coke & petroleum refining &

nuclear fuels 108.3 100.0 105.8 109.9 105.2

Chemicals & man-made fibres 99.1 100.0 103.4 104.3 107.9Basic metals & metal products 102.4 100.0 103.1 103.2 104.6Engineering 98.5 100.0 104.3 103.3 107.4

Other manufacturing 99.8 100.0 101.1 100.9 98.1Electricity, gas & water 98.4 100.0 101.1 100.9 98.1

Total 100.3 100.0 100.8 98.9 99.0% change -2.5 -0.3 0.8 -1.9 0.1 Manufacturing 99.8 100 102.0 101.0 102.5 % change -3.1 0.2 2.0 -1.0 1.5


United Kingdom 47


Construction, Great Britain 2002 2003 2004 2005 2006Volume of output (2000=100) 106.0 112.0 115.0 114.0 116.0Value of new orders obtained

by contractors (£ m) 33,411 33,951 39,088 43,933 47,698 New housing 9,217 10,812 13,850 15,122 16,069 Other new work 24,194 23,139 25,238 28,811 31,629Permanent dwellings (no.) Started 195,519 195,569 212,332 225,783 235,360 Completed 175,341 184,026 190,425 206,779 213,717


Stockmarket indicators (end-period)

2002 2003 2004 2005 2006FTSE-100 3,940.4 4,476.9 4,814.3 5,618.8 6,220.8

FTSE-250 4,319.3 5,802.3 6,936.8 8,794.3 11,177.8FTSE SmallCap 1,820.6 2,457.1 2,758.1 3,305.5 3,905.6FTSE All-Share 1,893.7 2,207.4 2,410.8 2,847.0 3,221.4

Source: National Statistics, Financial Statistics.

Exports of goods (£ m; fob; balance-of-payments basis)

2002 2003 2004 2005 2006Food, beverages & tobacco 9,991 10,886 10,578 10,646 11,067Basic materials 2,855 3,337 3,771 3,980 4,909

Fuels 15,997 16,558 17,885 21,497 25,242 Oil 14,318 14,608 16,200 19,795 23,124

Semi-manufactured goods 50,221 54,539 56,466 59,883 65,174 Chemicals 28,386 31,403 32,008 33,091 n/aFinished manufactured goods 106,373 102,427 101,296 114,490 136,847

Non-classified commodities 1,073 868 881 1,121 1,303Other 0 0 0 0 0

Total 186,510 188,615 190,877 211,617 244,542

Sources: National Statistics, United Kingdom Balance of Payments (The Pink Book) First Release-UK trade;.

Imports of goods (£ m; fob; balance-of-payments basis)

2002 2003 2004 2005 2006Food, beverages & tobacco 19,372 21,195 22,147 23,696 25,149

Basic materials 5,959 6,144 6,340 6,769 7,920Fuels 9,646 11,563 16,824 25,920 31,727 Oil 8,580 10,484 15,307 21,988 26,814

Semi-manufactured goods 52,720 56,089 60,226 62,677 69,581 Chemicals 23,773 26,168 27,927 29,146 n/aFinished manufactured goods 144,451 139,880 143,703 159,497 191,830

Non-classified commodities 1,450 1,609 1,807 1,840 2,026Other 0 0 0 0 0

Total 233,598 236,480 251,047 280,399 328,233

Sources: National Statistics, United Kingdom Balance of Payments (The Pink Book) First Release-UK trade.

48 United Kingdom


EU25 and non-EU25 trade (£ m; fob; balance-of-payments basis)

2002 2003 2004 2005 2006Exports to: EU27 114,123 110,589 111,653 121,494 153,589Non-EU27 76,662 78,026 79,224 90,122 90,953Total 186,510 188,615 190,877 211616 244,542Imports from: EU27 136,140 136,417 142,512 158,365 191,175Non-EU27 102,571 105,747 109,258 122,034 137,058Total 233,598 236,480 251,770 280,399 328,233

Balance EU27 -22,017 -25,828 -30,859 -36,871 -37,586Non-EU27 -25,909 -27,721 -30,034 -31,912 -46,105Total -47,926 -53,549 -60,893 -68,783 -83,691

Sources: National Statistics, United Kingdom Balance of Payments (The Pink Book), First Release-UK Trade.

Main trading partners (£ bn)

2002 2003 2004 2005 2006Exports fob to: US 15.1 15.3 15.0 14.6 13.1Germany 11.8 11.0 11.5 10.2 11.2France 10.1 10.0 9.8 8.8 12.0Ireland 8.3 6.5 7.0 6.7 7.2Imports cif from: Germany 13.9 14.0 13.9 14.0 13.0France 8.8 8.6 8.0 7.9 9.3US 10.7 9.7 8.8 7.9 7.9Netherlands 6.9 7.1 7.2 7.3 7.2

Sources: National Statistics, United Kingdom Balance of Payments (The Pink Book), First Release, UK Trade.

United Kingdom 49


Balance of payments, IMF series (US$ bn)

2001 2002 2003 2004 2005

Goods: exports fob 272.3 279.9 307.8 349.7 384.3

Goods: imports fob -331.6 -351.6 -387.3 -461.1 -509.4

Trade balance -59.3 -71.8 -79.5 -111.5 -125.1

Services: credit 121.0 135.3 158.6 197.4 207.8

Services: debit -100.2 -110.0 -127.3 -149.9 -163.7

Income: credit 202.9 187.3 205.8 260.6 339.8

Income: debit -186.1 -151.8 -165.7 -211.7 -290.1

Current transfers: credit 20.8 18.4 20.0 23.7 29.7

Current transfers: debit -30.5 -32.0 -36.4 -43.7 -51.8

Current-account balance -31.4 -24.6 -24.5 -35.2 -53.4

Direct investment in UK 53.8 25.5 27.6 77.9 195.6

Direct investment abroad -61.8 -50.3 -65.6 -98.2 -91.7

Other investment assets -255.5 -151.0 -415.6 -596.9 -909.1

Other investment liabilities 327.0 109.1 396.7 741.2 938.4

Financial balance 63.6 -66.8 -57.0 124.0 133.1

Capital account nie credit 4.8 3.5 4.6 6.6 7.9

Capital account nie debit -2.9 -2.1 -2.2 -2.8 -3.1

Capital account nie balance 1.9 1.4 2.4 3.8 4.8

Net errors & omissions 4.4 10.5 -12.3 21.4 -5.8

Overall balance -4.5 -0.6 -2.6 0.4 1.7


Foreign reserves (US$ bn; end-period)

2002 2003 2004 2005 2006

Total reserves incl gold 41.0 39.6 44.3 43.6 47.0

Total international reserves excl gold 37.6 35.3 39.9 38.5 40.7

Gold, national valuation 3.5 4.2 4.4 5.1 6.3


Exchange rates (£ per unit of currency unless otherwise indicated; annual averages)

2002 2003 2004 2005 2006

US$ 0.667 0.612 0.546 0.550 0.543

� 0.630 0.693 0.679 0.685 0.682

Skr 0.069 0.076 0.074 0.074 0.074

Swfr 0.428 0.455 0.439 0.442 0.433

¥ 0.0053 0.0053 0.0050 0.0050 0.0047

C$ 0.425 0.437 0.420 0.454 0.479

Source: IMF, International Financial Statistics; Economist Intelligence Unit.

Editors: Philip Whyte (editor); Neil Prothero (consulting editor) Editorial closing date: May 1st 2007 All queries: Tel: (44.20) 7576 8000 E-mail: [email protected]

Documents

United Kingdom - International University of Japan · United Kingdom 1 ' The Economist Intelligence Unit Limited 2007 Country Profile 2007 Contents United Kingdom 3 Basic data 4 Politics