x Abu Dhabi, UAEFriday 28 July 2017

UK's political marriage may soon lose its convenience

Having the Tories as the senior partner in the coalition governing Britain was the lesser of two evils for economic analysts, many of whom ask how long the union will last.

When David Cameron, the 43-year-old Conservative party leader and the UK's new prime minister, looked like he had won over the Liberal Democrats to form a coalition government after five days of haggling, the financial markets gave a huge sigh of relief.

"A Conservative-Liberal Democrat coalition is the market's favourite outcome," says Philip Shaw, the chief UK economist at Investec in London. But amid the rejoicing that tough measures to tackle the UK's record deficit might now be taken more swiftly than under a Lib Dem-Labour government, there must have been one or two niggling twinges of anxiety. The first concern is over the appointment of George Osborne as the chancellor of the exchequer. At 38, Mr Osborne is the youngest person to hold such a crucial post - at a very crucial time. The markets would have preferred to see an experienced hand such as Kenneth Clarke, the former chancellor, supporting a young prime minister.

But perhaps the more worrying question is how two parties with such distinct ideological differences can work together to ensure the long-term strong and stable government Mr Cameron alluded to in his pursuit of this coalition. They have made a good start with the appointment of Nick Clegg as the deputy prime minister and Vince Cable, the Lib Dem financial whizz, as business secretary. The parties have also reconciled policy differences. Among the economic proposals laid out yesterday in the government's programme, the coalition has agreed to accelerate efforts to cut the record budget deficit over the next five years, with £6 billion (Dh32.9bn) in spending reductions this year.

An emergency budget, to be delivered within the next 50 days, will prepare for big spending cuts. The coalition will also study a split between retail and investment banking, and raise the Bank of England's oversight of the financial industry. The new government will raise the income tax threshold to £10,000, a top manifesto pledge by the Lib Dems, to be paid by a Labour-planned rise in national insurance - which Mr Cameron pledged to ditch but will now go ahead with - and an increase in capital gains tax on non-financial assets.

Because of its cost, estimated at £17bn by the Institute of Fiscal Studies, the proposal to take the poor out of the tax brackets has been given a long-term target. But for how long? Obtaining a final seal on this sort of policy detail is tough enough with a single caucus, let alone across party and idealogical lines. All may not be as warm and cosy as it looks and the markets may bear out some of this uncertainty in the coming days if the big economic policies are not convincingly revamped and stamped.

Take the spending cuts for example. During the election campaign, the Lib Dems had agreed with Labour's view that cuts should be made only when the economic recovery had begun to strengthen. So although they have agreed to the deficit-reducing proposal, the Lib Dems want the cuts to be made on the advice of the Treasury and the Bank of England. There are also major differences in their policy towards the EU. As opposed to the Conservatives, the Lib Dems have always been pro-EU to the extent of wanting to replace the pound with the euro. For now, the parties have agreed not to join the euro.

"The odds are against it [the coalition] lasting four years," says Andrew Russell, a lecturer at Manchester University and the author of Neither Left Nor Right, a history of the Liberal Democrats. "It's possible it could last a couple of years." With recent euro zone history demonstrating the vital nature of decisive policymaking in the current global era of economic crisis, it's also possible the partnership may prove untenable a lot sooner.

business@thenational.ae