Coalition presents a mixed business bag

By Allister Heath, May 21, 2010

Buy sterling, sell the euro: that was the rallying cry in the City as the news sunk in that the Tories and Lib Dems had formed a coalition.

A few weeks ago, most economists feared Britain was on the brink of a fiscal crisis; they are much more optimistic today, especially with both parties committed to a tough round of fiscal consolidation. As long as the coalition continues to send out the right signals, and that the emergency budget contains a plausible plan to slash the deficit, it will have the support of the financial markets.

But while the macro picture has improved substantially, the government has also announced a series of measures that will hit business and investors. The big question is: what will happen to the banks? Will they be reformed rationally and carefully? Or will they will they be vandalised in a frenzy of populism, with no regard to the damage this would do to Britain's prosperity? It may take a year to find out, thanks to the new banking commission to be run by George Osborne with Vince Cable's help.

Other problems include the fact that the Tory proposal to cancel Labour's planned "tax on jobs" has been further diluted. The Tory dream to cut corporation tax to 25 per cent also appears to have vanished. Heathrow's third runway, which had the support of all business groups, has been cancelled; there will be no further runways at Gatwick and Stansted. It is unclear where increased capacity will come from to meet growing demand for air travel; if supply is not increased, the price of flying will go up.

It is also disappointing that capital gains tax is going up, likely to 40 per cent. There will be exemptions for business assets and entrepreneurs, though we don't know how useful these will be, nor what will happen to private equity funds and how employees with stock options will be treated. But as David Cameron has said, the tax hike is in part intended to discourage investment in buy-to-let properties. The hikes will hit millions of small investors, the kinds of people that the Tories used to see as their core voters.

The good news for Cameron is that over the next few months, his bad micro policies will take second fiddle to the great, burning macro issue of our time: the budget deficit and his refreshingly strong approach to tackling it. Until the public finances are firmly back on track, those in the business community angered by the government's many anti-business policies are likely to keep their powder dry - or that, at least, that is what David Cameron will be banking on.

Allister Heath is Editor of City A.M.

Last updated: 2:22pm, May 21 2010