The Magazine

Cohabitation, English Style

Can a marriage of convenience between Tories and Lib Dems endure for five years?

May 24, 2010, Vol. 15, No. 34 • By IRWIN M. STELZER
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But so far it seems as if the tax-cutting rhetoric is sharper than the scissors to be taken to the budget. Indeed, there appear to be more spending increases than cost savings. Spending on the bloated National Health Service is to increase in real terms in every year of the Parliament, which is scheduled to sit for a five-year term unless 55 percent of the members call for a new election. Spending on foreign aid is to “remain in place” at current levels. There will be “a significant premium” for disadvantaged students, funding of a variety of green projects, a loan guarantee scheme for small and medium size businesses, an increase in the escalator applied to state pensions, and a $24 billion cut in income taxes levied on the first $15,000 of earnings.

This will presumably be paid for by an increase in capital gains taxes on nonbusiness assets from 18 percent to 40 percent; a tax on bank profits and bonuses; cuts in benefits going to high earners; reductions in pay for civil servants (but only those earning more than $150,000); an increase in the retirement age to 66 (starting in 2016 for men and 2020 for women); and a tax increase on the employees’ portion of payroll taxes. Ominously, a review of the military budget is to be conducted “with strong involvement of the Treasury,” which has never met a piece of military equipment it thought worth buying. Finally, Commerzbank is predicting that the coalition will increase from 17.5 percent to 20 percent the Value Added Tax, a type of national sales tax that might be in our future.


The Conservative principles lurking in this deal are not immediately obvious, nor is it easy to find support for the argument that the net of all of this will be an acceleration in deficit reduction. Chris Giles, a columnist for the Financial Times, estimates that promised new spending and tax cuts come to more than 1 percent of national income, while the spending reductions and tax increases come to a mere 0.3 percent. 

It is easy to understand why the Lib Dems, by far the junior partner in terms of votes and seats—they actually lost seats in the election—feel that they have gotten more than they have conceded, although public chortling is just not on. Deficit reduction, it should be noted, is not in the Lib Dem DNA, unless it comes at the expense of military spending. 

The coalition is also agreed that the banking sector needs reform. Vince Cable, the avuncular Lib Dem who specializes in bank-bashing, has been made secretary for business and banking. The Tories are motivated to take on the banks by more than vulgar populist pressures, although those are present. Conservatives now in charge of the Treasury have emphasized to me that they plan to reduce the relative importance of the financial services industries in the U.K. economy, because that sector adds volatility to the entire economy, and to encourage industries that “make things.” Since financial services are one sector in which Britain has a clear competitive advantage, and Britain is unlikely to have much of an advantage over China in “making things,” this seems an odd goal, never mind that such an industrial policy would be more becoming to a Labour government.

The obvious subordination of principle to the desire for power should not obscure the great strength of the British system, the patience of the British people. Through days of wrangling in the back rooms of party headquarters, all the players behaved with, well, good manners. Gordon Brown, having failed to establish a coalition with the Liberal Democrats, bowed out of the picture. The negotiating parties avoided leaks and attacks on one another, despite the fact that they were coming off an acrimonious campaign. The civil service aided all the parties with the facts and data they needed to do the policy horse-trading that preceded the final agreement. The crowds gathered outside of Downing Street were small and well behaved. Nothing brings out the good sense of the British like a crisis.

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