The Fiscal Strategy of the UK Conservative-Liberal Democrat Coalition - Essay Example

THE FISCAL STRATEGY OF THE UK CONSERVATIVE-LIBERAL DEMOCRAT COALITION GOVERNMENT The Fiscal Strategy of the UK Conservative-Liberal Democrat Coalition Government Introduction In May 2010, the United Kingdom conducted a general election that led to a parliament where there was no outright majority. The Conservatives led by David Cameron and the Liberal Democrats led by Nick Clegg, therefore, formed a coalition government known as the Conservative–Liberal Democrat Coalition Government. Under this arrangement, David Cameron became the Prime Minister while Nick Clegg became the Deputy Prime Minister of the United Kingdom. These two opposite leaning political parties agreed to come together due to the need to address the prevailing economic crisis at the time especially the deficits that were quite evident in the budget of Great Britain. Amongst the compromises that the two parties made were their held fiscal policies, which have greatly affected the country to the present moment. The unresolved budgetary deficits, a weak economy and no framework for making a quick recovery for the economy can show this. When the recession hit Great Britain in the period 2007-2009, the Labour Government continued in its overspending in terms of the budget, which worsened the state of the public finances (Giudice, Kuenzel and Springbett, 2012, p. 22).  At the campaigns of the 2010 general election, the Conservatives promised faster action to curb borrowing in order to stabilize the economy. Through a new budget introduced on June 22, 2010 by the Chancellor of the Exchequer, the government planned to remove the deficit in the budget by the period 2014-2015. By this time, the amount of borrowing as a share of the GDP would have reduced, achieved through cuts in spending by a figure of 80% and increases in tax by 20%. This reassured the financial markets who continued to lend money and at the same time maintaining a low cost in the repayment of existing money owing. By doing this, the Conservatives had made a concession to their Liberal Democrats Coalition partners, which have led to several difficulties with regard to the fiscal strategy and policy as originally made. The Fiscal Strategy of the UK Conservative-Liberal Democrat Coalition Government The United Kingdom Conservative-Liberal Democrat Coalition Government aims at reducing the spending by the government so that the deficits that are in the budget are reduced. As already stated, it was initiated in the year 2010 with the main aim of achieving “cyclically-adjusted current balance by the end of the rolling, five-year forecast period”. This means that the intention of the fiscal policy was to have the austerity measures in place until the period 2015-2016, but this was pushed to 2018. What these austerity measures meant were that the savings that were intended to be made would be a figure of UK £83 billion over a period of four years and cut 490, 000 job placements in the public sector (BBC News Europe 2012). Subsequently in 2012, there were new measures introduced to ease taxes that included 5% cut on the top rate of tax and the increase in the threshold of the personal income tax allowance. There was also a cut on the personal income tax allowance that pensions are entitled to, the reduction of benefits to children and an increase on taxes levied on tobacco and other items. It is important to note from the onset that fiscal responsibility is one of the core policies of the Conservatives manifesto, which stresses on the sound management of the economy, support of investments by entrepreneurs and what it holds for future generations (The Guardian 2010). This is the major focus and the dominant fiscal policy that has been adopted by the coalition government to stabilize the economy of the United Kingdom. To some extent, it has been successful in pulling out Britain from its financial crisis and spend within her means. The key strategy for the government was to reduce spending and create an atmosphere conducive for investment. For instance, the government first embarked on cancelling unnecessary spending, which was wasting the much needed finances that led to the saving of about UK £6 billion within the first year of the coalition government. The Conservative-Liberal Democrat Coalition Government fiscal strategy has also been guided by the fact that it must adopt sound economic principles for economic growth. It has increased taxes based on consumption so that it does not affect the taxes received from taxing income and investment. Investments have also been encouraged and focused on sectors that are economically productive and profitable like in the clean energy infrastructure and transport sector. The government has also adopted strategies aimed at controlling the ever-increasing bills spent on welfare so that there is increased spending by the population on public services. For example, the public services have been reformed to be responsive to the needs of the citizens like in schools where parents can chose which schools to send their children and the make patients in charge of themselves through the help of doctors. Deficit Reduction According to the coalition agreement deal that brought the Conservatives and the Liberal Democrats, the main aim was to reduce the deficits in the budget and ensure a sustained economic recovery. This was to be achieved through reduced spending rather than increasing of taxes so that those with low incomes are protected from the effects of restrictions made on public spending (Haynes, 2012, 144). The plan for the reduction of deficits was set in an emergency budget in the first fifty days of the government coming into place to ensure that the results are felt even in the long-term. Therefore, the savings made through the reduced spending would be used in the support of jobs and the writing off backdated demands of rates made by businesses. Review of Spending The coalition government also embarked on reviewing the spending in all levels of government and the private sector. For instance, the amount allocated for the National Health Services (NHS) was increased while the government also intended to reduce unsustainable spending in other sectors so that it bridges the gaps in the (Great Britain, 2012, p. 32). The government also intends to fund an important premium for schoolchildren of disadvantaged families outside the budgets allocated to schools through reduction of unnecessary spending in other sectors. There is also a review of the nuclear activities of Great Britain to ensure that there is value for money spent by the Exchequer. Further, the Conservative-Liberal Democrats committed to review how affordable the public sector pensions would be in the long-term as long as the rights that have been accrued have been protected. Measures on Taxation The government also put in a strategy for increasing the personal allowance for income tax so that it supports those in the lower and middle-income segments starting from April 2011 (Great Britain and Tyrie, 2010, 61). The funding for this strategy would be derived from the money that would have been used for raising of employee national insurance thresholds that had been proposed by the Conservatives and revenues derived when the capital gains taxes rates for non-business assets are raised. Increasing the employer national insurance threshold as a policy brought forth by the Conservatives is meant to put an end to the jobs tax introduced by the previous regime of Labour government. This is achieved by increasing the personal allowance to UK £10,000 for the long-term objective of preserving jobs (Great Britain and Tyrie, 2010, p. 28). On this, the Liberal Democrats are allowed not to vote on resolutions that would introduce transferable tax allowances for those that are married and are eligible citizens of the United Kingdom. Further, under the agreement that brought the coalition together, there is a duty imposed on per-plane rather than per-passenger so that the extra revenue generated is used to fund the ballooning personal allowances. In addition, the UK Conservative-Liberal Democrats coalition government aims at taxing the non-business capital gains just the same way as it does on income but exclude activities aimed at investing in businesses (Great Britain and Tyrie, 2010, p. 40). More important is the elimination of the practice of avoiding paying taxes for every one concerned in the British economy. Reforming of the Banking Sector The coalition government also aimed at reforming the banking system with the aim of making the economy more competitive and helps in recovering the economy and maintaining jobs (Haynes, 2012, 143). This is to be achieved through taking action to restrict the taking of bonuses by those in the financial sector so that the banks that hold the economy together do not run into risks. The government also aims at reforming the banks in the manner in which they give credits by making them tap into the small and medium enterprises to support growth in that sector that creates jobs to its citizens. The nationalized banks have also been advised to consider a loan guarantee scheme and use of net lending targets so that they stay afloat during turbulent economic times as had been carried out in Greece under the guidance of the International Monetary Fund (IMF) (Haynes, 2012, 143). In addition, there may be need to separate the retail and investment banking so that the banks operate in a balanced and sustainable manner. Overall, the fiscal strategy with regards to the banking sector is to reform the banks so that they do not lead the country into a financial crisis like in the period 2007-2009. Therefore, the government makes use of the Bank of England to have control of the regulation of the macro and microeconomics prudential management. Pensions and Welfare The coalition government’s strategy is also to remove the default retirement age and have a review, which is to set the date that the age of pension from the state to rise to sixty-six years. There is also the application of the strategy whereby the government aims at making fair and transparent the payments made to the Equitable Life policyholders through independent payment providers. The coalition government has also endeavored to terminate all the existing welfare to work programs and instead preferred one welfare-to-work program so that those that are unemployed and those that lost their jobs can go back to their jobs and not rely on the state to take care of them (Heppell and Seawright, 2012, p. 138). This enables those that are still searching for jobs to benefit from the scheme after six months as opposed to the earlier twelve-month period. The policy would also require that all contracts are realigned with the welfare-to-work service providers so that more people are back to work or to their employment stations. The government also reforms the mechanism for funding the welfare-to-work programs so that the investments bring back savings in the end while receipts of benefits are pegged on a person’s ability to work Conclusion In conclusion, we can state that the main fiscal strategy adopted by the Conservative-Liberal Democrat Coalition Government was to reduce spending and change the tax regime with the aim of reducing the deficits in the budget. The austerity measures are also aimed at reforming the banking sector as banks played a significant role in causing the collapse of the financial system, which led to the recession. In addition, the coalition government introduces proposals that were meant to change the welfare and pension system and how it is financed as well as those that are entitled to benefit from it. However, these austerity measures required massive sacrifices in order to achieve the desired results, which are slowly bearing fruit in terms of reduced budgetary deficits and creation of jobs. Through the strategies adopted, the economy of Great Britain has greatly recovered making it retain its credit rating in the international financial world. This has helped it grow economically and create more employment opportunities for the citizens. It has also managed to lower the interest rates and restore the confidence of investors who feared increase in taxes by the Exchequer. The rich have also been made to pay more while the poor and vulnerable are protected by the fiscal policy of United Kingdom. Bibliography BBC News Europe (21 May 2012) EU austerity drive country by country. Downloaded 15 April 2014 from Giudice Gabriele, Kuenzel Robert, & Springbett Tom (2012) UK economy: the crisis in perspective: essays on the drivers of recent UK economic performance and lessons for the future London: Routledge; Ch 2. Great Britain & Tyrie Andrew (2010) June 2010 budget: first report of session 2010-11: report, together with formal minutes, oral and written evidence London: The Stationery Office; Ch 4. Great Britain. (2012) NHS Pay Review Boday: twenty-sixth report 2012. London;Stationery Office; Ch 3. Haynes Philip (2012) Public policy beyond the financial crisis: an international comparative study London: Routledge; Ch 7. Heppell Timothy., & Seawright David (2012) Cameron and the conservatives: the transition to coalition government Hampshire: Palgrave Macmillan; Ch 10. The Guardian (Wednesday 12 May 2010) Conservative-Liberal Democrat coalition deal: full text. Downloaded 15 April 2014 from Read More