Tax Analysts Blog

What's at Stake in the U.K. Election

Posted on May 4, 2015

On May 7 U.K. voters will go to the polls to determine the fate of the country's first coalition government since World War II. The election will also be the United Kingdom's first referendum on the austerity policies of the Cameron government. Across the Atlantic, many U.S. commentators have opined that little is at stake in the contest between Labour and the Conservatives because neither party is campaigning on drastic change, but that runs the risk of ignoring the important differences between the British and American political systems. The fact is that much is at stake in every U.K. election, and there are important differences between how a David Cameron-led coalition and an Ed Miliband-led government would approach tax and fiscal policy.

U.S. voters are used to experiencing elections that really don't matter much because of the divisions between the executive and legislative branches. For example, little changed after the 2010 and 2014 midterm elections because, despite the Republican victories, President Obama remained in the White House. No such separation of powers exists in the United Kingdom. The executive and legislative branches are essentially one and the same. Whichever party controls Parliament forms the government, handing out Cabinet-level positions to sitting MPs. This means that a U.K. government with a majority can actually carry out its election program -- the minority (opposition) in Parliament has few tools at its disposal to frustrate the majority's agenda. The United Kingdom is therefore able to have much stronger course corrections on policy than the United States, where 41 votes in the Senate can essentially frustrate any radical legislative changes.

The Conservative-led government has followed a harsh austerity plan for the last five years, trying to rein in government spending to prevent the debt-to-GDP ratio from spiraling out of control. It has also tried to reform the U.K. corporate tax system to attract more investment, continuing the policies of Gordon Brown's Labour government and adding tax cuts and incentives of its own. Voters don't seem likely to reward the Tories for making hard choices. Cameron’s economic policies have contributed to the rise of the SNP in Scotland (which will undoubtedly control more seats in the new Parliament than it ever has before) and to the drastic fall in support for Cameron's Liberal Democratic coalition partners. In response to cries that middle-income earners have suffered under his policies, Cameron is proposing several small tax incentives to help, including an increase in the personal allowance. The Institute for Fiscal Studies (IFS) is unimpressed, saying that 44 percent of taxpayers wouldn't be able to take advantage.

The IFS also doesn't think much of Labour's tax proposals. Miliband's plan to restore the 50 percent tax bracket would raise only £100 million, while his promise to cut taxes for low earners would only be worth “a princely 50p a week," the IFS sarcastically wrote. The IFS's director added, "There’s nothing in any of the parties’ proposals that we think will help the good functioning of the economy."

The parties do differ a great deal on spending priorities. The United Kingdom could add as much as £90 billion in debt by 2019 if it follows Labour's spending proposals, the IFS has said. The Conservatives would obviously not be as eager to undo their own austerity proposals.

Although the U.K. election is not exciting much interest in the United States, the results could dramatically affect both the U.K. economy and how it approaches tax and fiscal policy over the next five years. Whichever party or parties win must confront a steadily worsening budget picture. It is highly unlikely that either the Tories or Labour will stick only to the tax proposals they've put forward in the campaign. And both would probably approach the problem of revenues, spending, and attracting investment in radically different ways.

Read Comments (2)

Robert GoulderMay 4, 2015

Well said, Jeremy. The upcoming election also has major implications for
continued U.K. membership in the European Union. If there's a Tory-led
coalition once the dust settles (perhaps with UKIP and/or Lib-Dems as coalition
underlings), we can expect an "in/out" referendum on EU status in 2017.

Edward GateMay 7, 2015

This upcoming elections really have complicated issues, but its not about who
win or lose in this election, its about on who can save the economy :)

Great article Jeremy :)

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