2009 Index of Economic Freedom

Quick Facts

Population:

• 60.6 million

GDP (PPP):

• $2.0 trillion
• 2.9% growth
• 2.6% 5-year compound annual growth
• $33087 per capita

Unemployment:

• 5.4%

Inflation (CPI):

• 2.3%

FDI Inflow:

• $139.5 billion

The United Kingdom's economic freedom score is 79, making its economy the 10th freest in the 2009 Index. Its score is 0.5 point lower than last year, reflecting slightly lower scores in six of the 10 economic freedoms. The U.K. is ranked 4th out of 43 countries in the Europe region, and its overall score is much higher than the world average.

The U.K. has long benefited from openness to global trade and investment. It scores extraordinarily well in investment freedom, financial freedom, property rights, business freedom, freedom from corruption, labor freedom, and trade freedom. The average tariff rate is low, and regulation is efficient. Monetary stability is well maintained. There are few restrictions on foreign investment. The financial system is well developed, and credit is allocated on market terms. The judiciary is independent and highly capable of enforcing contracts and intellectual property rights.

The U.K. scores below the world average only in fiscal freedom and government size. Both the income tax rate and the overall tax burden are high. Government spending has risen steadily.

Background Back to the top

The United Kingdom is the world’s fifth-largest economy. Since the market reforms instituted by Prime Minister Margaret Thatcher in the 1980s, Britain has experienced steady economic growth, outpacing other large EU economies. The Labor government of Tony Blair promoted an open, global economic outlook and made stability a priority. The Bank of England’s independence contributes to monetary stability. The City of London remains one of the world’s leading centers of commerce; London financial markets appear to have gained a significant international competitive advantage as a result of implementation in the United States of the Sarbanes-Oxley Act. The U.K. is now the world’s top destination for foreign direct investment. As with most other Western European countries, Britain faces demographic challenges. Reform of public services, especially the National Health Service, is necessary but politically sensitive.

Business Freedom 89.8 Back to the top

The overall freedom to conduct a business is strongly protected under the U.K.'s regulatory environment. Starting a business takes 13 days, compared to the world average of 38 days. Obtaining a business license takes less than the world average of 225 days and is not costly. Bankruptcy proceedings are easy and straightforward.

Trade Freedom 85.8 Back to the top

The U.K.'s trade policy is the same as that of other members of the European Union. The common EU weighted average tariff rate was 2.1 percent in 2005. Non-tariff barriers reflected in EU policy include agricultural and manufacturing subsidies, import restrictions for some goods and services, market access restrictions in some service sectors, non-transparent and restrictive regulations and standards, and inconsistent customs administration across EU members. Ten points were deducted from the U.K.'s trade freedom score to account for non-tariff barriers.

Fiscal Freedom 61.0 Back to the top

The U.K. has a high income tax rate and a moderate corporate tax rate. The top income tax rate is 40 percent, and the top corporate tax rate is 28 percent, down from 30 percent as of April 2008. Profits from oil and gas extraction remain subject to a rate of 30 percent. Business and personal assets are subject to the same capital gains tax rate, effective April 2008. Other taxes include a value-added tax (VAT) and an inheritance tax. In the most recent year, overall tax revenue as a percentage of GDP was 39.0 percent.

Government Size 40.3 Back to the top

Total government expenditures, including consumption and transfer payments, are very high. Government spending has risen steadily since the 1990s and in the most recent year equaled 44.6 percent of GDP. Spending restraint is a priority for authorities moving forward. Public debt hovers at 40 percent of GDP.

Monetary Freedom80.4 Back to the top

Inflation is low, averaging 2.3 percent between 2005 and 2007. As a participant in the EU's Common Agricultural Policy, the government subsidizes agricultural production, distorting the prices of agricultural products. Prices are generally set by market forces, but pharmaceutical prices are capped, and the government influences prices through regulation and state-owned utilities. Ten points were deducted from the U.K.'s monetary freedom score to account for policies that distort domestic prices.

Investment Freedom90.0 Back to the top

Foreign investors receive the same treatment as domestic businesses, and there are few restrictions on foreign investment. The government rarely blocks foreign acquisitions, but registered companies must have at least one U.K.-resident director. The investment code and bureaucracy are generally transparent and efficient. Residents and non-residents may hold foreign exchange accounts. Payments and proceeds on invisible transactions and current transfers are not subject to restrictions, and profits can be repatriated freely. Foreign investors may purchase land.

Financial Freedom90.0 Back to the top

The U.K.'s financial system is efficient and competitive, offering all forms of financial services. Credit is allocated on market terms. Supervision is prudent, regulations are transparent, and oversight is maintained by an independent institution. There are no state-owned banks, but some government agencies provide grants and financing, and the Post Office provides some personal banking services. The insurance market is the world's third largest. Most large foreign insurers are represented, and many account for significant market shares. The London Stock Exchange is one of the world's largest exchanges.

Property Rights90.0 Back to the top

Property rights are respected and enforced. Contracts are secure. The legal system protects intellectual property rights. Violations of IPR statutes are viewed as serious crimes that threaten the economy and consumers. The National Intellectual Property Crime Strategy includes training for enforcers and those who are engaged in combating counterfeiting and piracy.

Freedom From Corruption84.0 Back to the top

Corruption is perceived as minimal. The United Kingdom ranks 12th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Bribery of domestic or foreign public officials is a criminal offense, and corrupt payments are not tax-deductible. Foreign investors generally do not view official corruption as a factor in doing business.

Labor Freedom78.5 Back to the top

The United Kingdom's flexible labor regulations facilitate overall employment and productivity growth. The non-salary cost of employing a worker is moderate, and dismissing a redundant employee is not burdensome. Regulations related to the number of work hours are quite flexible.