Policy Briefing
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Conservative/Liberal Democrat Coalition: Policy Briefing 28 May 2010 The purpose of this briefing is to provide a summary of the latest policy developments from the new coalition government formed on the 11th of May. The final updated was on 28th May to include ministerial responsibilities and the Queen’s Speech. Summary Key Policies – Financial Services & banking A reprieve for the FSA. The Bank of England will now “control macro-prudential regulation and [have] oversight of micro-prudential regulation”. But the FSA will not be disbanded. The creation of an independent committee that will outline agreements on a banking levy, robust action on unacceptable bonuses in financial services and ensuring credit flow to SMEs. It will also investigate the splitting of investment and retail banks. It will report in a year’s time. A free national financial advice service (Money Guidance). Key Policies – Deficit reduction There will be a significantly accelerated reduction in the structural deficit over the course of a Parliament. Cuts will begin this year and the coalition expects that with the main burden will fall on public spending and not increased taxes. There will be £6.2bn worth of cuts in 2010-11. These will be outlined in the Budget on 22nd June. A spending review of government departments to be undertaken. It will report in the autumn. Key Policies – Taxation There will be an increase in the personal allowance from April 2011 for those on lower and middle incomes. The longer term policy objective is to further increase the personal allowance to £10,000. There will be no national insurance rise for employers. However there will be a 1% increase for employees. There will be an increase in tax on non-business capital gains at rates “similar to income tax”. Key Policies – Pensions There will be a restoration of the earnings link to the basic state pension from 2011. The default retirement age will be phased out and there will be an end to compulsory annuitisation at 75. Key Policies – Other There will be a commission to look at the issue of long term care. Home Information Packs will be scrapped. There is the commitment not to seek to join the Euro during the new parliament. Political reform will see legislation to introduce five-year fixed term parliaments. There is also to be a committee to investigate the possibility of an elected House of Lords. Please note: This is an internal analysis of current policy trends and does not constitute a CII view on any of the political parties. Policy Briefing: 28 May 2010 Overview After five days of negotiation a deal was finally reached between the Conservatives and Liberal Democrats which meant that Britain had its first coalition government since the Second World War and its first Tory Prime Minister for 13 years. Following the electoral stalemate on 7th May which saw no single party win a workable majority many wondered what the outcome would be. In the end after fevered speculation and much negotiation the Conservatives and Liberal Democrats chose to go ahead with a historic coalition arrangement. The move has provided with David Cameron the keys to Number 10 and a good working majority and Nick Clegg with key Cabinet positions. It has also allowed both parties to adopt parts of the others’ manifesto, water down policies that have not been well received and in some cases make face saving tactical retreats which would not have been possible as the single governing party. The coalition arrangement has been hailed as the start of an era of “new politics”. Whether this ends up being the case remains to be seen. The pressure of governing the country will inevitably throw up issues that will test the strength of the agreement. Since the coalition was agreed on 11th May two documents have been published outlining the programme for government (For the more detailed paper published on 20th May click here). Both papers have given a flavour of what to expect from the new government and points of interest are covered in this briefing. The Queen’s Speech included legislation on some policy proposals and we expect further detail to be provided in the emergency Budget. Financial Services Regulation The cornerstone of the Conservative’s financial services pre-election was the abolition of the FSA with its responsibilities divided between the Bank of England and other new agencies. However the need for a coalition partner has meant that George Osborne has been unable to secure this particular policy. New Business Secretary Vince Cable was opposed to the plans believing that they would cause too much disruption at such a crucial time. Though this is a climb-down on Osborne’s part, the nature of the new coalition government has provided as face-saving way in which to drop something that had been questioned by many in the City. There will still be changes to the regulatory system despite the FSA’s apparent reprieve as the coalition has made it clear that it believes the system to be “fundamentally flawed”. The Bank of England will now “control macro- prudential regulation and [have] oversight of micro-prudential regulation”. It is expected that a new committee chaired by the Governor of the Bank of England will be given the power to instruct the FSA if too much risk is building up in the system. The FSA CEO will also sit on the committee. The coalition also set out more underlying regulatory principles such as the “one in, one out” rule whereby no new regulation is introduced with another being cut and the imposition of “sunset clauses”. The document of 20th May also promises an end to tick box regulation. Instead inspections will target high risk organisations through “co- regulation and improving professional standards”. We will watch developments on this last point in particular with interest. Banking Despite initial reports to the contrary, banking reform will be the responsibility of the Treasury. It had been thought that Vince Cable would oversee that particular portfolio; however this is not the case. The parties aim is to reduce systemic risk and have agreed on a number of policies including: the introduction of a banking levy; tackling unacceptable bonuses; fostering diversity in financial services, promote mutuals and create a more competitive banking industry; getting a flow of credit to small businesses and a loan guarantee scheme. They have also announced the creation of an independent committee that will investigate the issue of separating retail and investment banking. It will be given a year to report. This is perhaps a softer approach than some in the banking sector were expecting. There is no mention of the selling of shares in the nationalised banks and an absence of the Lib Dems £2000 cash bonus limit. CII Group Policy & Public Affairs 2 Policy Briefing: 28 May 2010 Deficit Reduction Though both parties agreed prior to the election that significant cuts were needed to tackle the deficit their manifestoes differed in the timescale for action. The Conservatives favoured swift action while the Liberal Democrats said it would be dangerous to cut spending before 2011-12. The coalition agreement states that there will be “a significantly accelerated reduction in the structural deficit over the course of a Parliament, with the main burden of deficit reduction borne by reduced spending rather than increased taxes”. This wording is very close to that of the Tory manifesto. The detailed plan for deficit reduction will be set out in an emergency budget, to take place on Tuesday 22nd June. This could represent the first real test of the coalition. In an announcement on 24th May the Treasury announced £6.2bn cuts in 2010-11. Some details such as the ending of Child Trust Fund payments and the amount each department has to save were provided, but the majority of the cuts have yet to be made clear. The creation of an Office of Budget Responsibility (OBR) was also announced. This independent body is a Conservative idea from its financial services White Paper and will look at forecasting growth figures and borrowing levels. The office was formally announced on Monday 17 May by the Chancellor. Sir Alan Budd will lead the new OBR with Geoffrey Dicks and Graham Parker completing the 3-member Budget Responsibility Committee. Legislation was announced in the Queen’s Speech to provide the OBR with a statutory footing. The Bank of England has come out in support of this acceleration of cutting spending and it is thought that it will reassure markets. For this to remain the case, more details on the cuts will need to be given sooner rather than later. The coalition partners have also announced that they will be holding a full spending review of government departments (reporting this autumn) and that there will be an independent commission to review public sector pensions. Taxation Agreement on taxation is one of the areas which will have required much negotiation given the differing approaches set out in the respective pre-election manifestos. The coalition agreement paper does show compromise on both sides but does still leave a number of question marks in terms of funding. Early indications of the tax measures are: an increase in the personal allowance from April 2011 for those on lower and middle incomes. There is also the longer term policy objective of further increasing the personal allowance to £10,000. This tax cut will take priority over other cuts, including inheritance tax (which had been a key Conservative policy). The Lib Dems had planned to pay for this with a “mansion tax”, however that idea has been scrapped; the cancellation of the planned national insurance rise for employers but not for employees; an increase in tax on non-business capital gains at rates similar to income tax.