The Con-Lib Coalition Agreement – The detail so far

The precise text of the agreement that has led to the coalition government is set out below in the form it was released. Our initial comments on this very outline agreement are also set out below. An emergency budget is set to take place within 50 days of the signing of the agreement and we will update with news of any further developments as they arise.

Deficit Reduction

The parties agree that deficit reduction and continuing to ensure economic recovery is the most urgent issue facing Britain.

We have therefore agreed that there will need to be:

• a significantly accelerated reduction in the structural deficit over the course of a Parliament, with the main burden of deficit reduction borne by reduced spending rather than increased taxes;

• arrangements that will protect those on low incomes from the effect of public sector pay constraint and other spending constraints;

• protection of jobs by stopping Labour's proposed jobs tax.

The parties agree that a plan for deficit reduction should be set out in an emergency budget within 50 days of the signing of any agreement; the parties note that the credibility of a plan on deficit reduction depends on its long-term deliverability, not just the depth of immediate cuts. New forecasts of growth and borrowing should be made by an independent Office for Budget Responsibility for this emergency budget.

The parties agree that modest cuts of £6 billion to non-front line services can be made within the financial year 2010-11, subject to advice from the Treasury and the Bank of England on their feasibility and advisability. Some proportion of these savings can be used to support jobs, for example through the cancelling of some backdated demands for business rates.

Other policies upon which we are agreed will further support job creation and green investment, such as work programmes for the unemployed and a green deal for energy efficiency investment.

The parties agree that reductions can be made to the Child Trust Fund and tax credits for higher earners.

Comments: The key point here is that spending cuts rather than taxation rises will bear the burden of deficit reduction. That said, the door is most certainly left ajar for future tax rises and VAT seems to be emerging in the eyes of most commentators as the favourite to see a rise in its rate. In terms of the European Community the UK VAT rate is relatively low which again makes it a likely candidate for rises. The reduction to the child tax trust fund and tax credits for the higher paid were part of both parties' manifestos and are not unexpected.

Spending Review

The parties commit to establishing an independent commission to review the long term affordability of public sector pensions, while protecting accrued rights.

We will restore the earnings link for the basic state pension from April 2011 with a "triple guarantee" that pensions are raised by the higher of earnings, prices or 2.5%, as proposed by the Liberal Democrats. Comments: It is hard to believe that any independent commission will conclude that public sector pensions are affordable and whilst accrued rights are to be protected, measures on future public pensions seem inevitable. Tax Measures

The parties agree that the personal allowance for income tax should be increased in order to help lower and middle income earners. We agree to announce in the first Budget a substantial increase in the personal allowance from April 2011, with the benefits focused on those with lower and middle incomes. This will be funded with the money that would have been used to pay for the increase in Employee National Insurance thresholds proposed by the Conservatives, as well as revenues from increases in Capital Gains Tax rates for non-business assets as described below. The increase in Employer National Insurance thresholds proposed by the Conservatives will go ahead in order to stop Labour's jobs tax. We also agree to a longer term policy objective of further increasing the personal allowance to £10,000, making further real terms steps each year towards this objective.

We agree that this should take priority over other tax cuts, including cuts to Inheritance Tax. We also agree that provision will be made for Liberal Democrat MPs to abstain on budget resolutions to introduce transferable tax allowances for married couples without prejudice to this coalition agreement.

The parties agree that a switch should be made to a per-plane, rather than per-passenger duty; a proportion of any increased revenues over time will be used to help fund increases in the personal allowance.

We further agree to seek a detailed agreement on taxing non-business capital gains at rates similar or close to those applied to income, with generous exemptions for entrepreneurial business activities.

The parties agree that tackling tax avoidance is essential for the new government, and that all efforts will be made to do so, including detailed development of Liberal Democrat proposals.

Comments: The increase in personal allowances which was part of the Liberal manifesto appears to have won out over the Conservative manifesto for increasing the threshold at which Inheritance Tax applies, which has been put on the back burner. The substantial increase in Capital Gains Tax as applied to non-business assets was always a target of the Liberals and we await with interest the detail behind this proposal. Will it apply from next April or will it be brought in from the date of the upcoming emergency budget? How will business assets be defined? How generous will the reliefs and exemptions for entrepreneurial business activities be and how will such activities be defined?

As expected tax avoidance will remain at the top of the agenda, hardly surprising for a government that needs to reduce such a colossal deficit. It will be interesting to see if the favourable regime for non-domiciles will survive.

Banking Reform

The parties agree that reform to the banking system is essential to avoid a repeat of Labour's financial crisis, to promote a competitive economy, to sustain the recovery and to protect and sustain jobs.

We agree that a banking levy will be introduced. We will seek a detailed agreement on implementation.

We agree to bring forward detailed proposals for robust action to tackle unacceptable bonuses in the financial services sector; in developing these proposals, we will ensure they are effective in reducing risk.

We agree to bring forward detailed proposals to foster diversity, promote mutuals and create a more competitive banking industry.

We agree that ensuring the flow of credit to viable SMEs is essential for supporting growth and should be a core priority for a new government, and we will work together to develop effective proposals to do so. This will include consideration of both a major loan guarantee scheme and the use of net lending targets for the nationalised banks.

The parties wish to reduce systemic risk in the banking system and will establish an independent commission to investigate the complex issue of separating retail and investment banking in a sustainable way; while recognising that this would take time to get right, the commission will be given an initial time frame of one year to report.

The parties agree that the regulatory system needs reform to avoid a repeat of Labour's financial crisis. We agree to bring forward proposals to give the Bank of England control of macro-prudential regulation and oversight of micro-prudential regulation.

The parties also agree to rule out joining the European Single Currency during the duration of this agreement.

Comments: Success in bringing banks to the table in terms of getting a credit flow to SMEs seems to be a subject that to date has resulted in far more talk than action. Loan guarantee schemes have not proved particularly successful to date and lending targets, it could be argued, created the mess they are currently in. Nobody wants banks to lend to businesses that are not viable but assessing viable and non-viable prospects is far from straight forward.

Pensions and Welfare

The parties agree to phase out the default retirement age and hold a review to set the date at which the state pension age starts to rise to 66, although it will not be sooner than 2016 for men and 2020 for women. We agree to end the rules requiring compulsory annuitisation at 75. We agree to implement the Parliamentary and Health Ombudsman's recommendation to make fair and transparent payments to Equitable Life policy holders, through an independent payment scheme, for their relative loss as a consequence of regulatory failure.

The parties agree to end all existing welfare to work programmes and to create a single welfare to work programme to help all unemployed people get back into work.

We agree that Jobseeker's Allowance claimants facing the most significant barriers to work should be referred to the aforementioned newly created welfare to work programme immediately, not after 12 months as is currently the case. We agree that Jobseeker's Allowance claimants aged under 25 should be referred to the programme after a maximum of six months.

The parties agree to realign contracts with welfare to work service providers to reflect more closely the results they achieve in getting people back into work.

We agree that the funding mechanism used by government to finance welfare to work programmes should be reformed to reflect the fact that initial investment delivers later savings in lower benefit expenditure.

We agree that receipt of benefits for those able to work should be conditional on the willingness to work.

Comments: The promised end to compulsory annuitisation at 75 is most encouraging. It will be interesting to see the detail that emerges around this proposal.