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Article taken from:

Quarterly Bulletin
Winter Edition
January 2010

The Conservative Party's economic and financial plans

• Tory proposals are more detailed than is generally recognised
• Well-known tax cutting plans remain, but would be delayed
• A mass of regulatory changes in the financial sector would occur
• A fundamental shift in monetary policy is being considered
• There would also be independent oversight of the Budget

Opinion polls have suggested for some time that there will probably be a change of government at the general election, due no later than June. It is therefore timely to look at the main changes to financial policy that a Conservative government would be likely to make, should David Cameron find himself able to form a government.

There is greater detail to Conservative plans than most people recognise. There is an almost bewildering range of new policy initiatives across all departments, and in some areas the proposed reforms are far-reaching. Tax, spending, regulation, budgetary control and the setting of monetary policy would all see marked change. Certainly, should these plans be enacted, they would result in a financial landscape that would be noticeably different from the present one. The following areas are of particular interest.

Tax

The Party is being more forthcoming about where it would cut tax than where it would increase it, although it is committed to a major reduction of the budget deficit. As we highlight elsewhere, it is almost inevitable that there will be a net tax increase in the next parliament, whatever the colour of the government. With that caveat there are some clear priorities.

The much publicised promise to raise the inheritance tax threshold to £1m remains, but would be delayed until the budget deficit is stabilised and tax cuts could be spread more widely. Likewise, the commitment to reverse the increase in the top rate of income tax to 50% remains, but would not be an immediate priority. It would only be considered when the proposed public sector pay freeze comes to an end. Rather, the early priorities would be a cut in corporation tax, a cut in national
insurance contributions for small firms and an increase to £250,000 in the
threshold at which stamp duty becomes payable on house purchases. There
would also be a £2.6bn package of tax breaks to help people to find work, and
a new £50bn Loan Guarantee Scheme for small businesses.

There is also an interesting commitment to set up a new Office of Tax Simplification. All parties are in favour of simplifying tax in theory, but the practice always proves difficult. However, the commitment to a body specifically tasked with making progress in this area is a new one. Certainly Britain has one of the most complex tax systems in the world and there is a whole range of areas in which the simplification of tax would be beneficial, if vested interests can be overcome.

Financial Regulation

The Conservatives plan wholesale reform of regulation, with financial regulation at the heart of it. They believe that the current ‘tripartite’ system, by which the Treasury, the Bank of England and the Financial Services Authority (FSA) have responsibility for different aspects of the financial system, has failed. They think this was one of the main reasons that the UK was more severely hurt than most by the global credit crunch.

They propose therefore to break up the FSA in its current form, and to give the Bank of England clearly defined responsibility for financial stability. A new Financial Policy Committee would stand alongside the Monetary Policy Committee (MPC) to monitor financial stability and be responsible for a new regime for dealing with failing banks.
A system would also be put in place to ensure that those covered by the£50,000 deposit insurance scheme would be paid out within seven days in the event of a collapse.

Meanwhile a new Consumer Protection Agency would take on most of the supervisory powers of the FSA and Office of Fair Trading. In addition, they also propose to limit the Governor of the Bank of England’s term of office to one, longer, term of 8 years, as they believe that the current system of reappointment subject to the approval of senior ministers discourages impartiality.

Inflation Targeting

A highly significant possible change is that the Conservatives would increase scrutiny of appointments to the MPC, and there is talk of a radical change in its remit. At present the MPC’s responsibility is to target a specific rate of consumer price inflation, whereas in many countries the central bank’s remit is a more flexible one of maintaining economic strength and stability. Conservative research suggests this should include a recognition that asset price inflation, most obviously house prices, should pay a part in policy, as well as consumer price inflation, and that the level of debt in the economy deserves greater attention. Such a change would potentially be the most fundamental policy shift, with significant long-term consequences for markets.

For markets, another interesting area of intended reform is to the budgeting process. The Conservatives believe that Gordon Brown’s self-policed ‘golden rule’ on borrowing limits has not worked. So they intend to set up a new independent Office of Budgetary Responsibility to oversee the promised reduction in the budget deficit. It would not have statutory powers to set budgets, but it would set out the
long-term fiscal framework and hold ministers to public scrutiny in meeting their targets.

There are many other policy initiatives which will affect investors. In particular the promises to “break open the monopoly of state provided education” and to forge “a new approach to funding vital infrastructure” seem to offer potential opportunity for the private sector. The utilities would also be likely to see radical changes, although it is not yet clear whether investors will benefit or be disadvantaged by these plans. It is beyond the scope and space of this article to go into these areas in detail, but we will keep you updated as events unfold.