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UK Election A Victory For Uncertainty

by Robert Lee, Tax-News.com, London

10 May 2010


The long-awaited UK general election has resulted in the first 'hung' parliament since 1974, leaving the vital question of how tax and spending policy will be used to control the country's fiscal deficit under an unwelcome cloud of uncertainty.

With votes in the majority of parliamentary constituencies having been counted, at the time of writing the Conservatives form the largest party in the House of Commons, expected to have 307 seats. This puts the party well ahead of the ruling Labour party, who have so far won just 251 seats, a loss of about 90 seats. However, this result places the Tories short of achieving the hoped-for 326 seats needed to achieve an absolute Commons majority.

Under Britain's somewhat antediluvian constitutional system, in the event that no party wins an overall majority, the incumbent Prime Minister has the right to make the first attempt to form a government. But with so few seats, and having polled 2 million votes less than the Conservatives, commentators seriously doubt whether Prime Minister Gordon Brown has a sufficient mandate to be able to do this.

As expected, the Liberal Democrats are the key power brokers in all this, despite under-performing at the polls and winning just over 50 seats. In a desperate bid to cling on in power, Brown is expected to approach the left-leaning Lib Dems with a view to forming an anti-conservative coalition. Labour would be expected to make concessions however, and the unpopular Mr Brown may well have to fall on his sword as a consequence. On the other hand, the Conservatives could make a deal with Northern Island's Democratic Unionists, and when combined this bloc would edge David Cameron's party closer to the 326-seat winning line, and probably able to form a functioning minority government. A Tory-Lib Dem coalition looks unlikely at this stage, but anything seems possible after an unpredictable night in the counting stations. Tory leader Cameron is expected to make an announcement early in the afternoon London time, when he will outline his party's strategy for forming a government.

While the result was not as close as expected, the situation is clearly not very helpful in terms of Britain's perilous fiscal position; the UK's budget deficit is larger even than Greece's and the world's financial markets were hoping for a decisive victory by one party or another so that some form of credible deficit reduction plan could be carried through an entire parliamentary term. As is stands, Britons could asked to go to the polls again sooner rather than later.

The outcome is also, of course, not desirable for businesses, with a lack of certainty over the direction of tax and economic policy meaning that many businesses could leave investment plans on hold, especially if a minority government is determined to hobble on from one crisis to another in the weeks and months ahead.

None of the major parties are promising very much in the area of taxation, however. Most of Labour's tax rises have already taken effect, such as the 50% top rate of tax, the bank bonus tax and the partial increase in National Insurance contributions (NICs). Other tax increases, including an additional increase in NICs and the withdrawal of pension tax relief for high earners are due to come into force next year. The last budget also proposed an increase in the top rate of stamp duty on homes purchased for GBP1m or more to 5%.

The Conservatives have pledged to roll back part of the planned NI increase, and have made vague noises about reducing corporate tax by 3% to 25% paid for by withdrawing various corporate tax reliefs and concessions. They have also promised some other modest cuts to inheritance tax and income tax for married couples. However, they have been rather reticent to say whether they would repeal the 50% tax rate.

The Liberal Democrats claim to have the most 'radical' tax platform, and have pledged to increase the income tax allowance to GBP10,000, taking 4 million people out of the income tax net altogether. The party would pay for this tax cut by clamping down on tax avoidance, ensuring that the wealthy pay more tax, imposing a ‘mansion tax’ on homes worth more than GBP2m and environmental taxes on the aviation sector.

However, what businesses want now is for the parties to act quickly and decisively in order to come to some workable consensus. According to the British Chambers of Commerce, prior to the election nearly two-thirds of businesses (65%) were “concerned” or “very concerned” about the potential impact of a hung parliament.

“Businesses are right to be wary about the prospect of a hung parliament. Instinctively, companies prefer a clear mandate to lead and govern," said David Frost, Director General of the BCC. "With our economy still fragile and the public finances in a dire state, the overwhelming concern is whether a hung parliament will provide decisive action around the UK’s unsustainable deficit."

TAGS: tax | economics | business | fiscal policy | budget | corporation tax | United Kingdom | individual income tax

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