UK’s new coalition government policies to impact consumers and businesses

The results of the UK May 2010 general election produced a hung parliament, the first since 1974, and a previously unthinkable Conservative/Liberal Democrat coalition government. The most urgent task is the reining in of massive government borrowing through public spending cuts and tax rises, which will affect consumers negatively.

However, cancellation of plans for a 1% rise in employer National Insurance (NI) contributions will help businesses invest more readily.

  • The May 2010 general election resulted in a hung parliament (no one party with an outright majority). The Conservatives and Liberal Democrats formed a coalition government. The Conservatives, Labour and Liberal Democrats secured 306, 258 and 57 seats respectively, whilst other factions gained 28 seats;
  • This is the first coalition government since 1945. It could herald a change in the British political system if a referendum bill on the voting system is passed to consider the Alternative Vote and the reorganisation of constituencies;
  • However, much pain is anticipated to tackle the large public sector net borrowing of £163.4 billion as of the 2009/10 tax year. The UK general government budget deficit was 11.5% of GDP in 2009, one of the highest in Western Europe, with general government gross debt amounting to 68.1% of GDP, according to Eurostat.
UK public sector net borrowing: 2002/03 – 2009/10 fiscal year
£ billions (excluding financial interventions)

Source: Office for National Statistics & HM Treasury.

Implications

Coalition policies could result in a retrenchment by consumers in the short-to-medium term but will encourage some business development:

  • Plans to axe the Labour proposed 1% National Insurance (NI) rise for employers will bode well (employees will still shoulder a rise) incentivising new employment. Unemployment amounted to 2.51 million (the highest in 16 years) or a rate of 8.0% in Q1 2010;
  • Incremental rises in income tax thresholds to £10,000 by 2015 will help poorer households but the employee NI rise may negate any gain in consumption. UK income inequality is prevalent with annual household disposable income of the poorest decile 1 (the lowest earning 10% of households) equating to 1.5% of the total in 2009 whilst the richest decile (decile 10) accounted for 27.7% in 2009;
UK household annual disposable income by decile: 2009
% of total
Source: Euromonitor International from national statisticsNote: Deciles are calculated by ranking all the households in a country by disposable income level, from the lowest-earning to the highest earning. The ranking is then split into 10 equal sized groups. Decile 1 refers to the lowest earning 10%, through to Decile 10, which refers to the highest earning 10% of households.
  • A possible doubling of the capital gains tax from the rate of 18% in 2010 could help pay for the income tax threshold rises. This will discourage investment in the stock market and hit higher-income consumers, as second home and buy-to-let property sales will be subject to this. However, entrepreneurship will be encouraged through allowances for business activities;
  • Public spending cuts are planned, amounting to £6 billion in 2010 to reduce government borrowing. Regions such as the North East and Northern Ireland could be hit disproportionately, given a larger concentration of public sector jobs, which could adversely affect consumption. Over the last decade, as manufacturing waned in these regions, their economies were boosted through relocation of government agencies;
  • The shelving of the “mansions tax” on homes worth over £2 million has ended the prospect of large-scale selling and a price slump at the higher end of the property market. However, the postponement of the £1 million threshold for Inheritance Tax will be viewed negatively by the rich;
  • Britain will not be joining the euro in the next five years, protecting itself from further bail-outs of unstable eurozone countries, and it will retain autonomy over interest rate decisions. However, trade will remain at the mercy of currency fluctuations. UK exports in goods to the EU-27 accounted for 55.4% of total exports in goods in 2009;
  • The cap on immigration from non-EU countries could ease Britain’s overcrowding and the burden on public services. However, industries such as catering and financial services could see a drop in talent, dissuading foreign investment. Foreign citizens accounted for 6.9% of the population in 2009;
  • Tax credits are likely to be reduced for higher income families whilst pensions will be raised by the rate of average earnings, inflation or 2.5% (whichever is higher). The latter will make pensioners better off. In 2009 those aged 65+ accounted for 16.2% of the population but this will increase to 17.4% by 2014.

Prospects

UK GDP is expected to grow by 1.3% in 2010 and 2.5% in 2011 in real terms, after a real decline of 4.9% in 2009. Austerity measures will weigh on economic growth in the medium term.

The government will prepare a budget in the first 50 days of office. An increase in the rate of Value-Added-Tax (VAT) from 17.5% in 2010 is widely expected. Such austerity measures will adversely affect consumer-facing sectors and tighten disposable incomes, with possible strikes and in extreme circumstances, civil unrest.

The coalition government also proposes to phase out the retirement age of 60 for women and 65 for men amid an ageing society, by attempting to set a date for a rise, but not before 2016 for men and 2020 for women.