Another Tory-Lib Dem coalition in 2015? It’s no done deal

With £40bn of fiscal misery still to come, talk of another Tory-Lib Dem coalition predicated on possible tax cuts seems far-fetched

The polls suggest the next election will be tight, so we can expect 18 months of speculation about the likelihood of a hung parliament and the coalition deals that might result. Expect every policy announcement to be scrutinised as much for what it says about future coalition talks as it will be for its actual content.

That tendency was on display this week, after reports that the Conservatives will go into the next election offering an identical tax cut to the Liberal Democrats, in the form of a rise in the personal tax allowance to £12,500. It fuelled the view, already vogue-ish around Westminster, that the coalition partners are manoeuvring themselves towards another Tory-Lib Dem administration. Having agreed on the defining issue of this parliament – the stance on the deficit – they now appear to be as one on tax reform.

Yet this reading of the Westminster runes is getting way ahead of itself. For a start, the idea that George Osborne would increase the tax threshold simply to play footsie with Nick Clegg is far-fetched. Presumably he’s doing it as he believes it’s one of the most popular coalition policies, and costly, and as Chancellor he’d like some credit. From a Lib Dem perspective, if the Tories match them on tax cuts this will simply prompt Clegg to make a fresh demand. That’s the dynamic of coalition politics.

The more significant point is that tax rises, as opposed to tax cuts, are as likely to be the make-or-break issue. Despite a recovery, the central fact about the next parliament remains the £40bn or so of fiscal misery still to be dished out. And, under Osborne’s plans, this will overwhelmingly come from spending cuts rather than tax increases.

As a result, a crucial point of differentiation between the Tories and the Lib Dems will be whether tax rises on the affluent can do at least some of the work of restoring fiscal balance. And that is where today’s coalition partners could hit a wall.

Not all tax rises, of course, need to be set out in any coalition agreement(you will look in vain for the words “VAT rise” in the 2010 agreement). But as the smaller partner, and having learned bitter lessons since 2010, the Lib Dem leadership knows that any progressive tax increases they favour which the Tories oppose will have to be thrashed out in the initial deal. If not then, never.

Indeed, it’s hard to see how any agreement could get past Lib Dem backbenchers, as it would have to, without meaningful commitments on the affluent contributing more. For Clegg to emerge from talks empty-handed on this would be a humiliation. Yet Cameron is not likely to yield to this demand (recall that last year Cameron refused Clegg’s offer of cutting the 50p tax rate to 40p in return for a mansion tax).

Meanwhile, Labour will seek to elevate the “who pays?” question. Ed Miliband has already signed up to a mansion tax, and it’s unlikely there will be enormous differences of principle on some of the favoured Lib Dem ideas – such as further limiting pension tax relief, a land value tax, and tightening up on inheritance tax. In fiscal terms these proposals are relatively modest; politically, they matter.

And when it comes to prioritising areas of spending, there may be a meeting of minds too. Few noticed that the Lib Dems recently proposed an ambitious childcare policy of up to 25 hours a week of free pre-school provision – and if that has a familiar ring, it’s because it’s more or less the same policy Labour announced at their conference.

Even on the thorny question of tax cuts, the difference between a larger personal allowance and Labour’s 10p starter rate of tax can be overstated – the latter could be viewed as a step towards the former. Bear in mind too that inflation will on its own lift the £10k personal tax allowance to roughly £11.5k by 2020: will a £1k difference in the size of the allowance over five years be a more difficult bridge to cross for Miliband and Clegg than taxing wealth will be for Clegg and Cameron? Not obviously so. If talks between Labour and the Lib Dems founder on this issue it will reveal that one or both parties had already decided they didn’t really want the deal.

Ultimately, the nature of any future coalition, should the circumstances arise, will be determined by the parliamentary arithmetic. Sure, there are policy differences. They matter. But nothing that any of the parties has so far committed to will prove decisive. It’s still wide open.

This article originally appeared in The Guardian