Great stuff on the deficit; less good for UK businesses

Allister Heath
WE are only just into day three of the new government and already powerful themes are beginning to emerge. The policies announced yesterday can be divided into three categories: those that will address the crippling budget deficit and will therefore help stave off an immediate fiscal, sterling and gilts crisis; those that will boost competitiveness over time and are thus hugely important to the long-term future of this country; and, regrettably, those that will reduce the UK’s attractiveness.

It is excellent news that the parties have agreed that the main burden of deficit reduction will be borne by reduced spending rather than increased taxes; while no fresh details have been revealed, the buzz I detect from the coalition is that they will be serious on this point. All the pre-election scaremongering has been forgotten; the emergency budget and the spending review are likely to be very tough. The creation of an office for budget responsibility will undoubtedly help make cuts more palatable by exposing the off balance sheet liabilities of the Labour years.

In many areas, the new coalition will have very radical policies led by reforming ministers. Most exciting was the news that Michael Gove will be in charge of education, where he will hopefully push through his plan to allow state money to be used to fund a new generation of privately managed schools. Ian Duncan Smith as the new works and pensions secretary is also excellent news: welfare reform is desperately needed to try and encourage and help those who are currently out of the labour market to find gainful employment. If those two are able to push through truly radical reforms, the new government could end up achieving a great deal to make Britain a better place.

Other positive developments include the fact that David Laws, the new Lib Dem shadow chief secretary to the treasury, is on the free-market wing of his party and will therefore complement George Osborne well. The Lib Dems have agreed a free vote on nuclear power, which makes sense.

In other areas, however, the coalition has already announced measures that will damage the UK’s competitiveness. The government has kept all of the Lib Dem and Tory anti-bank policies; it seems more interested in populist headlines than in seeking to rebuild a more secure, more robust City that creates sustainable wealth. As expected, Heathrow’s third runway is dead in the water; in addition, there will be no further runways at Gatwick and Stansted. Air Passenger Duty will be replaced with a per flight duty, which presumably means higher taxes. Does the new government really believe that flying is an evil that, increasingly, only the rich should be able to afford? It’s all very depressing.

It is also disappointing, though not surprising, that capital gains tax is going up, probably to 40 per cent. There will be exemptions for business assets and entrepreneurs. We don’t yet know the crucial details – how employees with stock options will be affected, whether entrepreneurs will be sufficiently protected and so on. An equally pressing question is what will happen to private equity funds: if their gains are not classified as business income, that industry’s long-term future in the UK would appear to be bleak, with disastrous consequences for jobs in London’s financial and business services industries as well as for the portfolio firms they provide capital to. Australia, New Zealand, Holland, Hong Kong and Switzerland are among the countries where the capital gains tax rate is already zero; and those countries have all shown that it is possible to do this while preventing regular income from being wrongly relabeled as capital gains to avoid tax.

Other problems include the news that the Tory proposal to cancel around two-thirds of Labour’s planned tax on jobs has been further diluted. The rise in employers’ national insurance will be stopped but not the employees’ share; this will partly be offset by the plan to increase the personal allowance but still represents a climb-down. But an even more depressing surrender is that the Tory dream to cut corporation tax to 25 per cent and then even lower appears to have vanished without trace.

So it’s a mixed bag. There is nothing here for business or entrepreneurs; the City is going to be hammered yet again. But a gilts crisis will hopefully be avoided and there will be schools and welfare reform. We will know more tomorrow; watch this space.