CBI welcomes the new coalition

May 18 2010 by Sarah Green, The Journal

AFTER an extraordinary week in British politics, here is how things look to us here at the CBI.

We welcomed the formation of the new coalition Government, and the priority that it is going to give to “a significantly accelerated reduction in the structural deficit, with the main burden of deficit reduction borne by reduced spending rather than increased taxes”.

That’s just what we had been asking for. Can it be delivered?

The Conservatives and the Liberal Democrats start off with broadly similar views on the importance of deficit reduction. And a coalition representing nearly 60% of the votes cast a week ago should have more ability to drive tough decisions through parliament than would a minority Government representing only 36% of the votes. Both parties have a strong incentive to make the new arrangements work properly – the Lib-Dems, in particular, would be in dire trouble if they were to break down. A key appointment is that of LibDem David Laws as chief secretary to the Treasury, the man who will have to oversee the detail of the spending cuts. This means that both parties will have their hands on the tiller when the hard decisions are made.

Of course, both parties have had to make compromises to arrive at this agreement, and some of them are on matters of concern to business.

For example:

The proposal to tax “non-business capital gains at rates similar or close to those applied to income”. The detail here will be critically important.

The two parties have agreed a compromise on nuclear energy, but there is a question about who will provide the political leadership that will be necessary to drive through the nuclear rebuild. The new Government also wants to increase the target for renewable energy, but that would be subject to the advice of the climate change committee, which seems unlikely to approve it.

There was some initial confusion about who would be in charge of regulating and supervising the banks. But it’s now clear that political responsibility will lie squarely with the Treasury, which is where it belongs. We await details on the new banking levy; on the proposals “for robust action to tackle unacceptable bonuses”; the commission looking at separation of retail/investment banking and on proposed measures to improve the flow of credit to SMEs.

So there are lots of policy details to be worked through, and there are certainly tough times to come. We now have a Government with the capacity to govern, and a determination to get to grip with the public finances.

The economic clouds are also beginning to lift a little. The week brought strong output figures from the manufacturing sector, and a report from the Bank of England, which is still pointing to a steady rise in output and stable inflation over the next couple of years.

Sarah Green is regional director of CBI North East