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Howard Flight: There are advantages to the Coalition - but will it be able to deal with the biggest challenges facing the country?

Flight_howard_2 Howard Flight was MP for Arundel and South Downs between 1997 and 2005, is a former Shadow Chief Secretary to the Treasury and Deputy Chairman of the Conservative Party, and is now chairman of Flight & Partners Recovery Fund. In this article he joins the chorus of concern about increasing Capital Gains Tax.

Whether consciously or unconsciously, in the aggregate the UK electorate got the Government for which it voted.

There are some powerful advantages of the Conservative/Lib Dem coalition Government:  it has a much stronger mandate to take the financial and economic measures necessary than would have had a Conservative Government with a small majority:  circumstances also mean that it has a relatively free hand to govern, overriding manifesto commitments. 

David Cameron has conducted himself with considerable statesmanship and responsibility in forming the Government and clearly increased his national stature.  Also, if the Lib Dem MPs who are not in the Government start to cause problems down the line, the Liberal Democrats will get the blame for this.  I would also support wholly the inclusion of Frank Field, who is possibly the only person who could achieve a sensible rationalisation of, and the restoration of the work ethic to, the welfare system.

The proof of the pudding will be in the eating: clearly the main challenges are to sort out the public finances, revive the private sector economy, to reform and streamline the public sector and to amend our relationship with the EU, both to stop it damaging the UK economy and to return appropriate powers to the UK.  My concerns are that the achievement of these priorities may be damaged by other, political agendas such as constitutional reform and alternative energy policies.

While the Government might argue that the result of the General Election reflected a Social Democrat consensus, I question whether the right economic measures to succeed can be taken in this context.  Key aspects of the reforms needed are manifestly capitalist – to down size the wasteful and over-bearing public sector and to reduce the tax burden. 

As previous studies have shown, raising Capital Gains Tax to 40% or 50% is likely to cost a 0.5% per annum of economic growth.  With large mortgages to service and increasing student debt to repay, there is little “fat” amongst middle England to pay higher taxes;  nor, moreover, is London and the South East willing to subsidise yet further, other parts of the UK. 

The Senior Salaries Review Body reported recently that average public sector workers earned 10.8% more than average private sector workers during the 2008/09 financial year.  The correct economic relationship is the other way round.  Given that the overwhelming majority of public spending goes on pay, the economic message is clear.  We wait to see – with an important start on 22nd June with the emergency Budget – whether the coalition Government has the bravery to get on with the right and necessary economic and financial measures.

Perhaps, however, my contribution should have concentrated this month on what is happening in Europe.  There is now the risk of major monetary contraction requiring major offsetting QE – Governments borrowing from the Banks or Central Bank purchases of Government debt, outlawed by the Maastricht Treaty.

Moreover, now the “fault line” of the Euro, which was always there, is so apparent it is becoming increasingly clear that the Euro Zone cannot survive in its present form.  We wait to see how the end game will be played and when.  The logical economic conclusion would be for Germany, Holland, Austria and Poland to withdraw from the Euro and adopt a new “strong” DM equivalent – leaving the Euro to be a much weaker currency for the less competitive members. 

Clearly there are the risks both that the UK ends up incurring significant EU bail out costs as a result of the Euro crisis and that the economically depressing effects on Continental Europe, as a major market for the UK constrain UK economic recovery.


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