A Fair Deal on the Economy

Not surprisingly, the issue of the economy dominated the election campaign and would no doubt have been the first topic of discussion between Conservative and Liberal Democrat negotiators as they endeavoured to reach an agreement on the key issues that would enable a coalition government to be formed.

In the hours and days following the publication of the agreement document, many observers have concluded that the Conservatives won virtually a full house of manifesto pledges, but this is not necessarily the case.

Their biggest victory was on spending cuts, with the Lib Dems – who remained largely silent amid the Labour-Conservative arguments over the timing of cuts – agreeing to Tory plans to make £6bn efficiency savings this year, on top of planned savings previously announced by the Labour Government.

The Conservatives also placed themselves in an extremely strong position, politically and strategically. Not only did George Osborne retain his inheritance of the top job of Chancellor (with Lib Dem rival Vince Cable taking the reasonably high-profile Business brief previously held by Lord Mandelson), Lib Dem negotiator David Laws was handed the poisoned chalice of Chief Secretary to the Treasury.

Until now a post mainly familiar only to political and economic buffs, it is Mr Laws who has direct responsibility for designing the solutions to the country’s cavernous deficit – in tabloid terms, he is the man who will wield the axe. Far from being able to play hostage to the Tories’ agenda, the Lib Dems, too, risk facing the wrath of the electorate in 2015.

We will get our first glimpse of the interplay between Mr Osborne and Mr Laws when details are released next week of the promised £6bn efficiency savings, and again when the Budget is delivered in June, followed by the long-awaited departmental spending review in the autumn.

However, the agreement contains not-insignificant victories for the Lib Dems too. One of these is the inclusion in the coalition agreement of their plan to raise the income tax allowance to £10,000 for all but the highest earners, lifting thousands of low-paid workers out of income tax altogether and reducing the burden for all basic-rate taxpayers. However, this will only be phased in, starting in April next year. In return – crucially – the Conservatives were forced to water down their flagship reversal of the planned rise in National Insurance.

The details of this seem to have escaped widespread public attention, but my understanding of the agreement is that although employer contribution thresholds will be raised as planned to counter what the Tories call a ‘jobs tax’, equivalent adjustments to employee thresholds have been sacrificed in favour of the Lib Dems’ income tax reforms.

Together with the decision to kick the Conservatives’ inheritance tax cut into the proverbial long grass and the right to abstain on tax allowances for married couples, it seems the Lib Dems gained more ground on economic issues – particularly in the field of taxation – than many have assumed. Other notable Tory-advocated tax measures, such as reductions in child trust funds and child tax credits, were not areas of great controversy between the two parties.

As I will outline in succeeding posts, there are a number of issues on which the Conservatives can claim substantial victories in the coalition agreement, but the economy is not one of them.