- Basic data
- Public finances and the state budget
- Banking system
- Tax system
According to cheeroutdoor.com, the UK economy is the fifth largest in the world. GDP increased by 7.5% in 2021 after several lockdowns in 2020 and early 2021, but the UK still remained 0.4% below 2019 levels at the end of 2021. A combination of Brexit, the pandemic and energy disruptions market as a result of the Russian invasion of Ukraine is sharply raising inflation, now at a 30-year high (7%), to which the Bank of England responded by raising interest rates (1%). By the end of 2022, inflation is expected to reach around 10%.
A big impact on economic growth is expected in 2022 and 2023. Consumer and government spending will drive growth, but slow spending of savings will limit the economic recovery. Increases in taxes and health and social insurance, as well as complications in trade, will also slow growth. The structural weakness of the British economy remains low labor productivity (26% lower than in Germany and 16% lower than the G7 average); the development of the pound, which has remained volatile since the 2016 referendum, continues to have a major impact on the British economy. Low investment and productivity have hampered UK growth for decades. The government provides significant tax incentives to stimulate private investment and has promised to increase the level of public investment.
After leaving the EU’s single market and customs union, the UK is seeking to rebalance trade relations towards non-EU markets. The UK is one of eight European countries with a public debt to GDP ratio above 100%. The current account has been in deficit for a long time. Unemployment has remained at a low level in recent years, the trend is a record number of unfilled jobs.
Services accounted for 81% of GDP in 2020 and more than 40% of total exports. The most important element of the service sector is social and health services, professional services, ICT, accommodation, tourism and transport and administrative services. The manufacturing sector contributes approximately 17% to total GDP and accounts for 45% of exports. The strongest sectors are food production, automotive, chemical production, engineering, construction, transport equipment and metal production. Agriculture contributes only 0.58% to the economy. In 2021, the UK imported machinery and transport equipment worth almost £157 billion, the most of any commodity that year. “Miscellaneous” was the second most valuable commodity imported into the UK in 2020, with imports worth almost £68.4 billion.
|GDP growth (%)||1.4||-9.9||7.5||4.1||2.3|
|Export of goods (billion USD)||476||399.6||440.4||483.5||499|
|Import of goods (billion USD)||643||548.4||654.6||747.3||788.2|
|Trade Balance (Billion USD)||-167.3||-167.5||-216||-265.9||-291.5|
|Industrial production (% change)||-1.2||-8.5||4.7||3.7||2.1|
|OECD export risk||ON||ON||ON||ON||ON|
Source: EIU, OECD, IMD
Public finance and state budget
|State budget balance (% of GDP)||-8.5|
|Public debt (% of GDP)||103.6|
|Current account balance (billion USD)||-102.7|
Note: The fiscal year in the UK is from 1 April to 31 March.
Public finances were in relatively good shape before the outbreak of the pandemic, the government created a certain reserve in case of a negative development of the economy after Brexit. By March 2020, the state budget deficit was continuously falling (from 9.9% in 2010) to 1.1% in 2019/20. The 2021/22 budget ended with a deficit of £89.5 billion (3.8% of GDP), the 6th highest deficit since records began in 1947, still around a third of the £24billion deficit for 2020/21. The public sector budget balance sheet has been in continuous deficit since the 2002/03 financial year. A deficit of £99.1 billion is planned for the 2022/2023 budget. As the trend for revenue growth to outstrip expenditure growth, the deficit is expected to fall to £3 billion over the next 5 years.
In March 2022, national debt was £2,348 billion (96.2% of GDP), the highest since the early 1960s. The debt is expected to be around £ billion in 2022-23.
The UK has long been a capital self-sufficient country and has short-term bridging loans to foreign entities. It belongs to world creditors and is a member of the Paris Club of Creditors.
The UK has significant debts, especially towards developing countries. The British government covers its financial needs through quantitative easing – mainly through the sale of long-term bonds (gilts). The second tool for solving the government debt are bonds with a short maturity (treasury bills), usually for one to three months. The government also services the national debt through National Savings & Investments (NSI) products.
In the UK, foreign exchange reserves and foreign assets are held or controlled by the central bank. Reserves are made up of gold or a certain currency. They can also be special drawing rights and marketable securities denominated in foreign currencies, such as treasury bills, government bonds, corporate bonds and shares, and foreign currency loans. As of March 2022, the UK held USD 13billion in foreign exchange reserves. The current account, which includes investment income and transfers as well as trade, recorded a deficit of £60 billion in 2021, compared to £54 billion in 2020. The current account deficit was 2.6% of GDP in 2021, compared to 2.5% in in 2020.
British banking has the 3rd largest volume of deposits in the world. The Bank of England (BoE) is the 2nd oldest issuing bank still active (founded in 1694). The regulator of the British financial system is the Financial Conduct Authority (FCA), and the supervision of British banks is carried out by the so-called tripartite – the FCA, the Bank of England and the Ministry of Finance (HM Treasury). All deposits with British banks are legally insured up to 85 thousand from 1 January 2011. GBP (equivalent to EUR 100,000) per natural/legal person.
The main types of financial institutions in the UK:
- commercial banks: universal banks providing a wide range of financial services such as current accounts, deposits, loans (eg HSBC, Lloyds TSB, RBS, Barclays, Standard Chartered); building societies: provide similar financial services as commercial banks. According to the law, 75% of their activity must be the provision of mortgages and loans for household equipment. About 60 building societies operate in the country (e.g. Nationwide);
- foreign banks: 250 foreign banks operate in the country in the form of branches or representative offices; investment funds: investment companies that obtain financial resources by selling their own shares or by borrowing from other financial entities. Shares of investment trusts are traded on an exchange (eg Fidelity International);
- mutual funds: similar to investment trusts. They obtain financial resources by selling their shares (units).
Based on a measure of market value, the largest British bank is HSBC (Hongkong and Shanghai Banking Corporation). The big five British banks are further supplemented by Lloyds Banking group), Barclay’s, NatWest and Standard Chartered.
The London Stock Exchange is one of the five largest stock exchanges in the world in terms of market capitalization and is the largest stock exchange in Europe.
The UK is a country with a relatively low rate of taxation compared to the EU average. Among the greatest advantages of the British tax system are the number of tax credits and low employer contributions for social and health insurance. The tax system is stable and relatively transparent. Taxes and levies for social insurance (state health insurance is not set aside separately, it is part of social insurance) are collected by HMRC, i.e. HM Revenue and Customs (Her Majesty’s Tax and Customs Administration).
The UK has a progressive system of taxation for individuals. Individual rates are available on the UK Government website. Tax is usually deducted automatically from wages, pensions and savings. People and businesses with other incomes are required to declare in the tax return. The obligation to submit a tax return for the past financial year (April 1 – March 31) applies to self-employed persons (OSVČ) and partners in a company by September 30 (in writing) at the latest, or by January 31 ( electronic). Failure to meet the deadline is subject to a £100 fine.
Companies registered in the UK and citizens with permanent residence in the UK (tax domiciled residents) file a tax return with HMRC, where they tax worldwide profits and income. Companies registered outside the UK and non-domiciled residents only pay tax on profits and income generated in the UK.
Foreign income of UK tax residents is fully taxable where it arises and the tax paid abroad is deducted from the UK tax base. This is made possible by agreements on the avoidance of double taxation, which the UK has concluded with almost 100 countries. The basic rate of corporation tax is 19%, but the rate is due to rise to 25% in 2023 for businesses with profits over £250,000, for small businesses with profits under £50,000 it will remain at 19%, for medium-sized businesses with profits between 50 –£250,000 will be somewhere in the range.