Red lines and compromises

Nicholas Watt

The Tories and Liberal Democrats yesterday published an agreement on key policy areas:

Deficit reduction
This will be the “most urgent issue” facing the coalition which will embark on “a significantly acceler-
ated reduction” in the structural element of the deficit over the course of the parliament. Most of the
burden will be borne by spending cuts rather than tax increases, though the agreement does not say
whether the Tory target of 80%/ 20% will be upheld. “Modest cuts” of £6bn will be introduced this
year – a key Tory pledge which had been strongly opposed by the Lib Dems who had wanted to delay
the start of deficit reduction until next year.

Spending and a fairer society

A spending review in the autumn will confirm real terms increases in NHS spending in each
year of the parliament. Educational resources will be targetted at pupils from disadvan-
taged backgrounds – a key Lib Dem demand and also a Tory wish. The UN target of
spending 0.7% of GNI on overseas aid by 2013 will be met. The government will be
committed to a nuclear deterrent. The renewal of Trident will be scrutinised “to
ensure value for money”. Lib Dems will be free to make case for alternatives.

Tax measures
Tories have dropped pledge to raise inheritance tax threshold to £1m. Tory plans for a marriage tax
break will be kept but the Lib Dems will be allowed to abstain. Steps towards the Lib Dem policy of
raising the personal tax allowance to £10,000 – to exempt lower earners from tax – will be taken next
year. The allowance will be raised, with the benefits focused on lower and middle income earners. This
will be funded by using the money that would have been used to reverse part of the employee element
of Labour’s planned increase in national insurance and from bringing capital gains tax for non business
assets more closely in line with income tax. Tory plans to reverse Labour’s national insurance rise from
next year will go ahead.

Banking reform
A commission to examine the separation of retail banking will be set up. This is a compromise. The
Lib Dems wanted a clear separation. The Tories sympathised with this idea but were more cautious.
Tory plans to “abolish Gordon Brown’s failed tripartite system of regulation”, which sounded the
death knell of the FSA, is watered down. But the Bank of England will still be out in control of macro-
prudential supervision and will have oversight of micro-prudential regulation.

Immigration
A cap on non-EU immigration will be introduced. Lib Dems have
dropped “earned route to citizenship” for illegal immigrants who have
lived in the UK for more than ten years.

Political reform
A referendum on introducing the alternative vote system will be held. The Tories had opposed this
which the Lib Dems see as a first step towards proportional representation. The Tories will be free to
campaign for a no vote in the referendum. Parliaments will sit for a fixed term of five years - a key Lib
Dem demand - which can only be reversed by an “enhanced majority” in the Commons of at least 55%
of MPs. A committee to bring forward plans for a wholly or mainly elected upper house in PR elec-
tions will report in December. Cameron had described this as a “third term issue”.

Pensions and welfare

Implement the Tory plan to hold a review to set the date at which the state pension age starts to
rise to 66, though this will not happen before 2016 for men and 2020 for women. Agreed Lib Dem
proposals to scrap rules which require pensioners who can to buy an annuity by the age of 75. Tory
welfare reforms to be implemented in full.

Education
Tory plans to allow parents and voluntary groups to establish schools
to go ahead. In a nod to the Lib Dems such schools will have to be held
“properly accountable”.

Europe
The government will not join the euro and a “referendum lock” will be
introduced to ensure that any further transfer of British sovereignty
would have to be voted on. But the Tories have dropped their pledge to
repatriate social and employment laws and have toned down their lan-
guage on the British budget rebate.

Civil liberties
A freedom, or great repeal, bill will be introduced to scrap ID cards,
the national identity register and the next generation of
biometric passports.

Environment
Establish a smart grid, full establishment of feed in tariffs systems in electricity, scrapping home infor-
mation packs and scrapping planned third runway at Heathrow. Lib Dems will be free to oppose con-
struction of new nuclear power stations but will abstain in any Commons vote.