Election 2010: Deficit Tops Agenda As U.K. Cabinet Line-Up Is Revealed

Following five days of post-election uncertainty, the United Kingdom's new Conservative-Liberal Democrat coalition administration will today begin the task of governing. Given the country's relative inexperience of coalition governments and the urgent need to reassure markets that the administration can govern effectively, Conservative prime minister David Cameron and Liberal Democrat leader and deputy prime minister Nick Clegg have been eager to stress their firm intention to serve a full five-year parliamentary term. The two leaders have also pledged to adhere to the policy agreements reached during the five days of post-election negotiations, stressing their understanding of the need for rapid and clear deficit-reduction plans as well as tax and banking reforms. There are of course policy divergences between the two parties, notably on the European Union (EU) and nuclear power, but the Liberal Democrats have retained the right not to vote on legislation presented by the government that breaches their "red lines". In any case, the new coalition government is in a strong position in parliament, occupying 363 of the 650 seats (probably rising to 364 after the outstanding election in Thirsk and Malton is held on 27 May).

A "Full" Coalition: The Cabinet Line-Up

Cameron has been eager to stress that the Conservatives and Liberal Democrats have formed a "full" coalition, with both parties being equally responsible for decisions and polices taken. In a reflection of this, the Liberal Democrats have received four cabinet positions, in addition to the deputy prime minister role. Clegg, as well as being Cameron's deputy, has been given the role of Lord President of the Council (with special responsibility for political and constitutional reform). The second most senior position awarded to the Liberal Democrats is that of business, innovation and skills secretary, handed to Vince Cable, whose tasks will include overseeing banking reform. Cable is seen as an economic heavyweight and is likely to offer important assistance and support to Conservative Chancellor of the Exchequer (Finance Minister) George Osborne, whose relative youth and inexperience has already raised concerns over his ability to oversee economic recovery following the worst recession since the Second World War. The Liberal Democrats have also been awarded the position of chief secretary of the Treasury, with David Laws set to work closely with Osborne in formulating the new government's comprehensive deficit-reduction plans. Laws will also be responsible for oversight of the crucial three-year spending review that will be published later this year and form the basis for the deepest cuts in public spending. In addition to these economy-related positions, the Liberal Democrats have been awarded the portfolio of energy and climate change secretary in line with their agenda of ecological responsibility, and also the post of Scottish secretary.

Notable faces from the Conservative side of the cabinet include former party leader William Hague as foreign secretary, who will be responsible for leading the government's policy on Europe. This is an area where some key policy differences exist between the Conservatives and the Liberal Democrats, and some tough negotiations lie ahead on issues such as financial market regulatory reform. Another former Conservative party leader, Iain Duncan Smith, has been installed as work and pensions secretary in a bid to appease the more right-leaning elements within the party and to gain their approval for constitutional reform proposals. Conservative heavyweight Kenneth Clarke has been awarded the high-profile job of Lord Chancellor (justice secretary). Theresa May was a surprise appointment as home secretary, becoming only the second woman ever to hold the portfolio and the highest-ranked female member of the present cabinet.

Coalition Priorities

In their first day in office, Cameron and Clegg were eager to stress that their most urgent task in the near and medium term will be reducing the record budget deficit, which stands at £163.4 billion (US$241 billion; 11.6% of GDP). This clear commitment to addressing the deficit, highlighted in the published coalition agreement, has gone some way towards reassuring the markets. However, the real test will be when the new government delivers an emergency budget, expected no later than 50 days after taking office. At the core of the new budget is likely to be £6 billion (US$9 billion) in cuts to front-line services this financial year, a policy welcomed by Bank of England governor Mervyn King. Although the two parties have committed to reducing the deficit in record time largely through spending reductions, given the size of the fiscal gap, tax increases are inevitable. The tax changes will centre on an increase in capital gains tax (CGT) on non-business assets, while plans to reduce inheritance tax have been abandoned. The cuts and increases will also be essential to allow the government to fulfil its pledge to introduce a "substantial increase" in the income tax personal allowance from April 2011, with a longer-term objective of raising the personal allowance to £10,000. The coalition has also agreed on the need for banking reform, which is likely to include a levy on banks, proposals for tackling the bonus culture, increased competition in the industry, and an investigation into the benefits of separating investment and retail banking.

In line with the Conservatives' Eurosceptic stance, the new coalition has pledged not to join, or begin preparations to join, the euro during the current parliamentary mandate. Meanwhile, the government has agreed to scrap highly controversial plans to build a third runway at London's Heathrow Airport. In addition, the Liberal Democrats will be allowed to abstain from votes on Conservative plans for tax breaks for married couples and higher tuition fees. A Liberal Democrat spokesperson will also be allowed to speak out against plans for a new generation of nuclear power stations. The Liberal Democrats have also won substantial concessions on constitutional reform. The government is set to introduce a referendum bill on electoral reform to gauge opinion on the alternative vote (AV) system proposed by the Liberal Democrats, which have consistently condemned the highly distortive first-past-the-post voting system currently in place, which favours a two-party system. The coalition will also work to establish five-year fixed-term parliaments (see United Kingdom: 12 May 2010: Election 2010: U.K. Conservatives Return from 13-Year Exile, But in a Coalition).

Outlook and Implications