Political

The coalition agreement: banking and business

Welcome to the first in a series of posts going through the full coalition agreement section by section. You can read the full coalition document here.

For all the importance and controversy associated with banking reform, it is also one of the areas where cross-party agreement is easiest – because once you’ve decided that major reform is necessary, the differences of approach are essentially ones of pragmatic detail rather than principle. Some at the free-market or state control fringes may beg to differ, but it’s a debate about what will or won’t work rather than what political philosophers do or don’t believe.

In that respect, the coalition agreement punts one key issue into the not too long grass, by setting up a commission to investigate whether or not retail and investment banking should be split. I’m pretty relaxed about the commission route because the ridiculously busy lives led by frontline politicians means they actually have very little time to study large, complex policy questions. As a result, whilst political rhetoric can get very heated as different people say how absolutely sure they are that one particular approach is right, in practice none of the prominent MPs arguing for or against this split have had much time to study the issue in detail.

Other key parts of the agreement are introducing a bank levy, encouragement for more mutuals and more competition in the banking industry, actions on bonuses, enhancing the flow of credit to small and medium-sized firms and cracking down on white collar crime. Quite whether a crackdown on crime will mean more than many an announced Labour crackdown we can’t really judge until details emerge. However, the proposal to draw together into one body the anti-crime work that is currently split between the SFO, FSA and OFT looks promising. So too does the plan to introduce a free national financial advice service.

Perhaps the greatest doubts remain over financial regulation, where the agreement simply says:

We will bring forward proposals to give the Bank of England control of macro-prudential regulation and oversight of micro-prudential regulation.

The document also rules out joining the euro for the duration of the agreement, though given the economic situation even a Liberal Democrat majority government would not have been looking to join the euro in the next few years.

Moving on to business, there is a general tone of ‘we don’t like the volume and quality of regulation but we’re not quite sure of the details of how to fix that’. Instead, a series of principles and processes are laid down – a one-in, one-out rule whereby new regulation is matched by axed regulation, giving the public the chance to have more of a say over poor regulations, more sunset clauses for regulation and so on.

Another consistent thread is support for small businesses, including reviewing IR35 and the taxation of small businesses, looking to make small business rate relief automatic, letting social tenants starting businesses at home and allowing councils to take into account creeping dominance by large retailers when drawing up local development plans.

The two big headline issues in this area are corporation tax – with the intention to simplify and cut – and the Royal Mail, where the coalition “will seek to ensure an injection of private capital into Royal Mail, including opportunities for employee ownership. We will retain Post Office Ltd in public ownership.” Post Offices themselves will be allowed to offer a wider range of services and the creation of a Post Office Bank is to be considered.

On Regional Development Agencies, the cause of quite a lot of confusion in Conservative policy-making, the agreement is explicit that they go, to be replaced by Local Enterprise Partnerships. These will be joint local authority – business bodies led by local councils.

Overall these two sections would not look particularly out of place if they had been presented to a Liberal Democrat conference as a policy motion, save for the explicit reference about not joining the euro. As a result, Liberal Democrats are likely to end up happy or displeased with the government in these areas based on the practical experience of how well or badly they work rather than because many government initiatives run up against long-held principles.

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