Thirteen years of Labour rule ended this week. Tory leader David Cameron struck a deal with the Liberal Democrats to form Britain’s first coalition since Winston Churchill’s wartime government. The deal gives the Liberal Democrats – with 57 MPs – five seats in the cabinet and around 20 other jobs. That means almost half their MPs will be in government. The Cabinet members include deputy prime minister Nick Clegg, and Vince Cable, who will be in charge of business and banks.
The new government intends to rule for five years and will introduce five-year fixed-term parliaments. It will also hold a referendum on voting reform. The Lib Dems have dropped opposition to renewing trident and their intention to join the euro. They’ve also ditched their plans for a ‘mansion tax’ on properties costing over £2m. In return, the Tories’ plan to raise the inheritance tax threshold has been kicked into the long grass.
Another eye-catching compromise is that national insurance will rise only for individuals and not for businesses. Meanwhile, the government will gradually work towards raising the income-tax threshold for low earners to £10,000. There will be an emergency budget within two months. Sterling and gilts ticked up on news of the deal. A Lib-Lab deal “was never thought of as practical” in terms of cutting debt, said David Owen of Jefferies.
What the commentators said
As far as the City is concerned, this deal looks like “something of… a reverse takeover by the Lib Dems”, said Robert Peston on BBC.co.uk. On banks and taxation, much of the agreement bears a Lib Dem stamp. They have watered down the Tories’ commitment to dismantle the Financial Services Authority, for instance, while there will be an increase of capital-gains tax to bring it into line with income tax. The top rate will be at least 40%.
However, investors will be relieved that the Tories have pushed through a policy of tackling the deficit as early as possible, including £6bn of cuts this year. It’s clear that cutting a deficit of 11% of GDP is the coalition’s “top priority”, said Hugo Dixon on Breakingviews. This is just as well, given that the markets’ loss of confidence in European sovereign debt could prove “contagious”.
The emphasis on the deficit should bolster sterling. Plans to involve the Bank of England and a new Office of Budget Responsibility in vetting fiscal plans also bode well. They could prove a “necessary alibi to implement more savage cuts” than the Tories hinted at during the campaign. Given the scale of the challenges ahead, we need a government “built to last”, said the FT. Clegg and Cameron must “rise to the occasion”.
Key points of the coalition deal
• Accelerated reduction of the budget deficit, including £6bn of cuts this year
• National insurance to rise for individuals, but not for businesses
• Increase in personal income-tax allowances
• Mansion tax dropped and Tory inheritance-tax cuts shelved
• Independent commission to examine break-up of big banks and a levy on banks
• Rise in capital-gains tax for non-business assets
• Referendum on change to voting system
• Tory marriage tax break to be put to a Commons vote – the Lib Dems will abstain
• Referendum on any further transfer of power to Brussels
• Trident to be renewed