What does the coalition government mean for your finances?

Cameron and Clegg

On 13 May 2010 David Cameron became Britain’s 53rd prime minister. At 43 he is the youngest PM yet – beating Tony Blair by three months – but it’s his leadership of the first non–wartime coalition government in 80 years that will get more attention in the history books.

Despite once calling Nick Clegg his favourite political joke, the Conservative leader will have to take his now deputy prime minister a little more seriously. Likewise, just a week before election day Clegg told voters “there is a gulf between what David Cameron stands for and what I stand for,” making their sudden love–in somewhat bemusing.

Some Lib Dem voters say they feel betrayed; others think Clegg and co had no choice but to get on board with the Tories or risk staying politically irrelevant. Meanwhile staunch Conservative supporters would argue their party got the most votes and yet it has had to share power.  The question of electoral rights and wrongs could be argued all day with no definitive answer.

Ultimately these extraordinary times have called for extraordinary measures and while the coalition government isn’t to everyone’s taste the big question now is can it cure the nation’s financial headache?

In the pre–election run up all three parties conceded that severe cuts were necessary without stipulating where. Now like newlyweds back from honeymoon, the Con–Lib coalition has to get back to work. The new government swiftly released their coalition agreement and agreed that reducing the £166 billion deficit and ensuring economic recovery was their top priority, with plans to make more cuts this year. Former Lib Dem treasurer Vince Cable had called further cuts this year “a dangerous Tory proposal,” however, this is what the nation now faces.

The parties believe they can recoup £6 billion through cuts to non–frontline services and this decision has been greeted positively by Mervyn King, governor of the Bank of England.  “I am very pleased that there is a very clear and binding agreement to accelerate the reduction in the deficit over the lifetime of the parliament, and to introduce additional measures this fiscal year.”

Market reaction:
Initial response from the markets has been good: sterling is trading above the US Dollar and reached an 11–month high against the uneasy euro but Azad Zangana, Schroders’ European economist, says it’s too soon to pass judgment just yet. “It is too early to conclude that the new coalition has calmed market fears over the UK’s public finances, especially as we have only scratched the surface in the details.”

An emergency budget is to be held on June 22 and provided George Osborne, the new chancellor, demonstrates the government is taking decisive action, the markets should respond positively and the country’s credit rating won’t be downgraded.

In order to start marking inroads into our national debt the government is going to have to make some serious savings. Here we take a look at the agreement looks set to hit your own finances.

National insurance:
One of the Conservative’s most publicised policies from its manifesto was the proposed national insurance increase on thresholds. In a compromise the increase in employer national insurance thresholds will go ahead but there will be no increased threshold for employees. The money that would have gone towards this increase will instead be diverted towards the Lib Dem’s coveted income tax personal allowance increase to £10,000. Although thresholds won’t change just yet, the agreement promises ‘a substantial increase’ from April 2011.

This should benefit low and middle–earners, while the hold on NI increases for employers should act as an incentive to keep workers on. “For the majority of employers it would have proved to be an unpopular and unworkable tax rise. Although not perfect the new coalition government’s policy on NI is far better and provides a degree of certainty for business growth now and in the future,” says Phil Orford, chief executive of the Forum of Private Business.

Other tax measures:
The rate of capital gains tax will increase considerably from 18% to 40% or even 50% next April; however, this will apply to non–business assets only, such as shares and property. This measure was part of the Lib Dem manifesto and would recoup a fair bit for the government but further details need to be ironed out. For example, is it right to tax inflation on shares if it increases? The property market has expressed concern over this announcement, citing potential cold feet from investor’s as damaging to the recovery.

“It may make the more speculative investors think twice,” says Alison Beech Business Relationship Director at Spicerhaart. She adds: “The private rented sector will remain a vital option for increasing numbers of discretionary and forced renters. Anything that depresses the investor appetite for the sector is therefore unwelcome.”

The Liberal Democrats have shelved their proposed Mansion Tax plans, while the Conservatives have scrapped their planned inheritance tax cuts. There was nothing in the agreement on VAT but it’s widely expected that VAT will rise from 17.5% to 19% in January next year, raising approximately £8 billion.

“The government appears to have done more to set the UK’s pension system back on track in its first day, than the previous administration managed in 13 years,” says Tom McPhail. It’s a bold statement but it’s true to say that the coalition government hasn’t shied away from some big announcements.

The coalition’s “triple guarantee” promises the earnings link for the basic state pension will be restored from April 2011, with pensions raised by the higher of average earnings, inflation or 2.5% as proposed by the Lib Dems. McPhail calls the guarantee “surprisingly generous”. Getting an annuity by the age of 75 will also be no longer be compulsory and the default retirement age will be phased out. The state pension age will increase to 66, although this won’t happen before 2016 for men and 2020 for women.

A single welfare to work programme will be created to overtake all existing programmes that aim to get unemployed people back into work. Those receiving jobseekers allowance will be able to access this programme immediately instead of waiting 12 months under the old scheme.

Both parties have criticised Labour’s child trust fund scheme so it seems likely that there will be changes to the system at the very least. Little detail has been released so far, with the coalition agreement simply stating that ‘reductions can be made to the Child Trust Fund and tax credits for higher earners.’

All eyes will now be turned to George Osborne and the emergency budget for a more comprehensive breakdown of Cameron and co’s future plans. While a part of Labour may be hoping that the coalition falls on its face, the other part, for the sake of the British economy, will hope Clegg and Cameron’s love in lasts the course.