Well, I think people aren't thinking this through in a lot of the responses. I think the British Goverment made the right desician overall.
Without know the exact publisher, understand that there is currently a trade war between the US and Europe, even if it's not the nastiest one in history. Simply put Europe wants the EU to be the dominant world power, at least economically, and the US which is currently a service based economy and the dominant economic power doesn't want this to happen. The back and forth between Wall Street and the European Common Market has been going on for a while now, and we've even had snide referances in movies with bad guys demanding payment in "Euros, because the dollar isn't what it used to be" coming into popular culture.
While other nations give developers tax breaks, the UK is one of the greater global powers (though not a super power) and also a close ally of the US, despite out mixed relations with other parts of Europe. Despite the trade war we've remained relatively cordial, and closely allied in a military and political sense. While not one of the biggest industries, the gaming industry is a large, multi-billion dollar one, and by doing this it would give UK developers a substantial advantage, and mean more globally. This would of course cause the US and perhaps other affected nations to retaliate in a fashion that would give us more of an advantage in trade against the UK. Effectively bringing the UK more directly into economic competition/warfare with the US than it already is, and probably damaging our relations. All pressure about "The War On Terror" aside, neither the US or UK are fair weather friends to each other, and all differances aside can pretty much rely on each other when it really hits the fan despite political pressure. Tension on that alliance for economic reasons would benefit neither party.
Of course this is based entirely on what was said above, and is written assuming that it is fundementally correct in that such a desician would give UK publishers a major advantage.
While people are screaming due to their love of gaming, you need to ask whether more UK video games entering the market (entertainment) is worth the problems this could cause in the long run? Once stuff like this starts happening, it's inevitable it's going to domino into other industries and we're going to wind up in an economic knife fight.
Please also note I am not saying that the UK "needs" the US in any overreaching fashiom, and can't get by without us. Simply that in the end the alliance is worth a lot more than any short term economic gain. It moves back and forth for whom it's inconveinent for at the moment, but generally benefits everyone in the big picture, and this alliance in paticular helps with the oomph of both powers because it's known that if someone messes with the UK in a major fashion the US will back them up, and if someone messes with the US we can rely on having the UK at our back.
Enough rambling, these are my thoughts. Bad for video games (which I love), but probably a good thing overall.