The Economic legacy of the Coalition Government

Following the 2010 General Election, no party held an overall majority – with the Conservatives winning the most of any party with 306 seats. A coalition government comprising of the Conservatives and the Liberal Democrats followed, marking the first coalition government since the Second World War. Both parties entered government in the wake of the financial crisis of 2007-8. The new chancellor, George Osborne, outlined a deficit-reduction strategy as a means to improve the British economy. This was to be achieved through a combination of targeted tax increases and public spending reductions. The effects of these policies are of debate, however, given the relative strength of the UK economy by 2015 compared to its European neighbours, to call the economic agenda pursued by the coalition government an abject failure would be unfair.

Taxation

One of the biggest achievements of the coalition government was the reduction in numerous taxes. One notable example would be income tax, with the coalition increasing the personal allowance year on year. The personal tax-free allowance reflects the amount of money that can be earned before paying income tax. For 2010-11, the allowance stood at £6,475. This was gradually increased throughout Osborne’s tenure, reaching £10,000 by April 2014. By 2015, the increases in the personal allowance took 2 million of the lowest-earning workers out of paying income tax altogether; in this way, allowing the poorest in society to retain more of their earnings. These tax reductions allowed working individuals to keep more of their hard-earned money, giving them more money to spend, boosting economic growth in the process.

Median disposable household income by income group

Osborne also cut the top marginal tax rate, paid by those earning above £150,000, from 50% to 45% in his 2012 budget. Although counter-intuitive, the reduction in the additional rate led to tax revenues increasing. The amount of additional-rate tax paid increased from £38 billion in 2012-13 to £46 billion in 2013-14. This is due to the increased investment made in the UK economy by these higher earners, following these tax reductions, driving economic growth. Osborne described the lower rate as more ‘competitive’ – likely as higher earners tend to avoid paying excessively high rates, as they make it cheaper for them to arrange their financial affairs through various loopholes or by moving their money into tax-exempt securities.

In addition, the coalition government reduced corporate tax rates. It stood at 28% in 2010, with Osborne gradually reducing this over the coalition’s tenure, down to 20% by 2015. As with the income tax reductions, the corporate tax cuts led to an increase in revenue; from £35 billion in 2011 to just over £45 billion by 2015-16 – an increase of just under 30%.

Contrary to the aforementioned tax cuts, the coalition raised VAT from 17.5% to 20% in 2010. Osborne attempted to justify this move, describing it as ‘tough but fair,’ however, this tax increase likely slowed the post-recession recovery. As VAT is charged on the vast majority of purchases, this only made goods more expensive, thus decreasing the demand for them in the process, hurting businesses and therefore tax revenues in the long run.

Spending

As part of the government’s economic agenda, public spending was reduced as a percentage of GDP – falling by 6% from 2010-2015. This was largely due to reductions in public spending, although the UK’s GDP growth during this period also played a part, outpacing that of the G7 average.

One of the primary areas that Osborne identified in spending reductions, was in welfare. The benefit cap is one such example, which was introduced in 2013 at £26,000 for households and £18,200 for single individuals. This was a step forward in ensuring that work always pays more than being unemployed. Unsurprisingly, public backing for this policy was strong – with a poll in July 2013 showing that 73% support the introduction of Universal Credit, as a posed to 12% who opposed it.

Furthermore, the coalition government introduced Universal Credit – replacing and combining six benefits for those working with a low household income: income-based Employment and Support Allowance, income-based Jobseeker’s Allowance, and Income Support; Child Tax Credit and Working Tax Credit; and Housing Benefit. Universal Credit ensured that there was a gradual reduction in benefits, as an individual moved into work and starting earning money. This dealt with the problem of the ‘welfare trap’ that made unemployment more attractive than a higher salary due to a sudden reduction in welfare benefits. Thus, Universal Credit ensured that claimants would always be better off in work, given that they would keep a proportion of the money they earned.

The economy as a whole

Under the coalition government, the economy as a whole fared well. The employment rate for those aged 16-64 increased from 69% in 2010 to just under 73% by 2015 – levels higher than those prior to the recession.

With public spending as a percentage of GDP still above 40% by 2015, placing the UK 4th in the G7, the modest reductions in UK public spending were reasonable – aimed at reducing public sector waste, alongside ensuring that work always pays more than being unemployed.