The surprising scale of the Conservatives’ general election victory poses a potential dilemma for Prime Minister David Cameron.
Many thought that Cameron would be able to ditch some of the more daunting pre-election promises during coalition negotiations. With a Tory majority in the House of Commons, however, such compromises are off the table.
That means the party is going to have to deliver on some big promises that it made to the electorate. Here are all the biggest tasks facing the new government:
Referendum on Britain’s EU membership
Cameron has given a “cast-iron guarantee” to hold an in-out referendum on Britain’s membership of the European Union before 2018.
For many businesses, this Brexit threat was the central concern during the election campaign amid concerns that an exit could disrupt trade with the Continent and isolate the UK. Moreover, Cameron himself says he doesn’t want the country to leave the EU, but to remain in under renegotiated terms.
As he told Channel 4 on Sunday:
“The first thing is to get the renegotiation going. We will be doing that soon. I’ve already made calls to European leaders. Then the referendum. I’m confident we’re going to get the right result.”
There’s a big problem with that idea, however: European leaders aren’t interested in renegotiating on what they see as the fundamental principles of the union.
In January Jean-Claude Juncker, the president of the European Commission, likened Britain’s relationship with Europe to a love affair that is fading with age. He was very clear that principles such as right of citizens of EU countries to live and work in any member state were “red lines” that countries could not simply opt in and out of as they see fit.
In what could be viewed as a direct dig at Cameron’s renegotiation promises, he said:
“When one mentions the end of the free circulation of workers, there can be no debate, dialogue or compromise. We can fight against abuses — and national lawmakers can do that — but the EU lawmakers won’t change the treaties to satisfy the will of certain politicians.”
There is one piece of good news for Cameron though — it looks like the British people are becoming less and less keen on the idea of leaving:
Replacing the Human Rights Act with a “British Bill of Rights”
Michael Gove, the newly appointed justice secretary, has a major task on his hands. He is charged with scrapping the Human Rights Act, which means that decisions by the European court of human rights are binding on UK courts, and replacing it with a UK-only version where the Supreme Court would be “the ultimate arbiter of human rights matters in the UK”, according to the Conservative manifesto.
Yet there is strong resistance to the proposal both with and outside the party. Both the former justice secretary Kenneth Clarke and former attorney general Dominic Grieve have warned that attempts to scrap the Human Rights Act could leave the UK facing a constitutional crisis as it could violate the terms of the 1998 Good Friday agreement with Northern Ireland and antagonise the Scottish parliament.
After stepping down from the Cabinet last year, Clarke maintained that it would be “unthinkable we should leave the European Convention on Human Rights” noting that the convention was drafted by British lawyers and reflects British values.
As far as we understand it, the British bill of rights would remove the obligation for British courts to “take into account” rulings from the Strasbourg Court, although in practice the two might not depart much from one another. However, it would allow judges to rule that ECHR judges were incompatible with the Bill of Rights allowing them to ignore them on a more frequent basis than they can currently.
One prominent example of where the UK government has had a run-in with the European court was over the issue of the right of prisoners to vote. In February the ECHR ruled against the UK’s ban on giving convicted prisoners the vote for the fourth time, arguing that it amounted to a breach of Article 3 of the convention that asserts the right of people to a free election.
The UK government has long stymied these attempts as it claims that the matter is for the UK to decide on, and there is little public desire to change the existing law. As far as the government is concerned a British Bill of Rights could settle this issue, and others like it, for good.
Finding a way to get Housing Associations to sign up to Right to Buy
In the final weeks of the General Election campaign, the Conservative party began to issue a number of pledges intended to win around the electorate.
One of the most prominent of these was a plan to extend the Thatcher-era policy of allowing council tenants to purchase their houses at heavily discounted prices, know as the Right to Buy scheme.
Currently, only people living in council houses, which are owned by the government, are entitled to enter the Right to Buy scheme. They can purchase their homes at a discounted rate, which stands at a maximum discount of £77,900 across England and at £103,900 in London.
Around 800,000 housing association tenants have a “right to acquire” their homes right now, but their discount is smaller. Under the new Conservative rule, however, housing association tenants would be able to buy their homes at the same discount granted to council tenants.
That’s a problem because it seems to ignore one crucial problem: the government doesn’t actually own these properties.
Unlike council houses, Housing Associations are run as charitable trusts.
Firstly, this means that its completely unclear whether it would even be legal for the government to attempt to compel the associations to sell properties in the first place.
Secondly, they source their own financing to build houses with that debt held against the rental payments of the residents. At present they are some £60 billion in the red — and there is no clear indication from the government how this funding shortfall would be covered once the houses are sold off.
even if planning laws and financing constraints weren’t significant obstacles and you could replace the housing one-for-one by forcing the sale of the most valuable council stock as it becomes available and re-investing the money, it still doesn’t go nearly far enough to address the fundamental problem of Britain’s housing supply shortfall. That is, rather than spending the funds the council could get from the sales (valued at £4.5 billion a year by the Conservatives) to invest in an ambitious building programme, they are having to spend it to refund the Right to Buy discount and maintain existing levels of social housing.
Last but not least…delivering those promised £12 billion of welfare cuts
During the election campaign, Cameron claimed that over the course of the last parliament his government reduced welfare spending by some £20 billion relative to what would have happened if they had not taken any action. There is no doubt that this amounts to a significant change in the trajectory of spending but it should also be acknowledged that despite the heavy cuts the total outlay was only £2.5 billion lower in 2014 — 15 than it was in 2010 — 11.
In other words, the cuts have been made but the expected savings for the public purse failed to materialise.
And here’s why:
Over half of welfare (read social security) spending we are talking about here is accounted for by a combination of pensions, tax credits and housing benefit. Together those three account for £130 billion of the £210 billion of total social security spending in the 2013-2014 fiscal year.
Unfortunately, the OBR’s forecasts consistently underestimated the amount of money that was spent on these areas. And by some distance.
Assuming that most of the easier cuts have already been made, the options for further reductions in the welfare bill may be limited. Below are a selection of the problems the current government will face in finding that magic £12 billion of savings.
The triple-lock handcuffs
It is hard to imagine an example of a Coalition policy that more clearly violates its “we’re all in this together” rhetoric than the so-called triple-lock guarantee.
Under it the government committed to increase the state pension every year by the higher of inflation, average earnings or a minimum of 2.5%. In other words, the government was guaranteeing to spend more on pensioners every year in real terms even as they were preaching the need to bring down state spending.
This was even more generous than the deal offered by the previous Labour government, which had planned for the Basic State Pension to increase in line with earnings growth. In the words of the independent Institute for Fiscal Studies (IFS):
“In terms of uprating, then, benefits for pensioners have been protected from cuts, or even been made more generous, whereas those for working-age people have been made less generous.”
The bottom line here is that the government is now spending more on state pensions than before the onset of its austerity measures, with each recipient getting nearly £500 a year more on average over this parliament. An odd choice, you might think, considering how much of the total welfare budget was already being spent on pensioners.
So why did they do it? Older people vote.
And this is what it looks like in practice — pensioners have escaped the last few years relatively unscathed while working-age benefit recipients have had to take a much bigger hit to their incomes.
Given that the political calculation for sparing pensioners from cuts will not change over the next five years, we can expect the triple-lock to remain in place and with it the imperative to find even deeper cuts elsewhere to hit the Conservative’s ambitious budget targets. Indeed the prime minister has already pledged to protect pension payments.
The housing benefit headache continues…
If the government’s decision to help pensioners reflected a political calculation that the electoral rewards would outweigh the fiscal costs, the same can surely not be said of the housing benefit bill.
Over the course of the past five years the cost of housing benefit has risen by £700 million, some £3 billion more than the Coalition initially thought it would need to spend on the programme. The reason for this is fairly simple: The recovery in wages for British workers has been hugely disappointing for all involved, with salaries down in real terms, while rents have been moving in the opposite direction.
As a consequence, the government has been forced to house many more people than it was expecting in private rental housing. And here’s what happened — housing benefit costs have shot up:
Wages in the UK are finally picking up, but the pace remains disappointing and real income gains are largely being driven by rock-bottom inflation rather than successful wage negotiations. However, these wage gains will have to accelerate faster than rents over the next few years if the housing benefit bill is going to start falling.
That is a big leap of faith.
Making cuts is never ESA-y
Another of the challenges that forecasters have faced is the mess of the employment and support allowance (ESA).
Initially designed by the then Labour government as a replacement for incapacity benefits, the ESA programme was supposed to offer significant savings. In reality the costs of incapacity benefits in 2015-2016 were revised up by £3.5 billion.
Why? Well it turned out that the number of people who were wrongly claiming incapacity benefits was much lower than the government had thought and underestimating the difficulty of launching the new system has left a backlog of caseloads that has slowed the transition of claimants from incapacity benefits to ESA.
The result was that those expected savings proved to be, well, a mirage.
Yet the Conservatives think that they will be able to secure a 17% reduction in spending on disability living allowance (DLA) by transferring claimants to the new personal independence payments (PIP) system. The IFS seems rather (to put it politely) sceptical of this claim (emphasis added):
Much of the hoped-for savings from the introduction of ESA have failed to materialise, and it is an open question whether the personal independence payment will be any different. Mr Osborne wants further cuts to social security spending to help reduce the deficit. He may end up having to make cuts just to stay on track.
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