Coalition Agreement

Conservative Liberal Democrat coalition negotiations

Agreements reached

11 May 2010

This document sets out agreements reached between the Conservatives and Liberal Democrats on a

range of issues. These are the issues that needed to be resolved between us in order for us to work

together as a strong and stable government. It will be followed in due course by a final Coalition

Agreement, covering the full range of policy and including foreign, defence and domestic policy

issues not covered in this document.

1. Deficit Reduction

The parties agree that deficit reduction and continuing to ensure economic recovery is the most

urgent issue facing Britain. We have therefore agreed that there will need to be:

• a significantly accelerated reduction in the structural deficit over the course of a Parliament,

with the main burden of deficit reduction borne by reduced spending rather than increased

taxes;

• arrangements that will protect those on low incomes from the effect of public sector pay

constraint and other spending constraints; and

• protection of jobs by stopping Labour's proposed jobs tax.

The parties agree that a plan for deficit reduction should be set out in an emergency budget within

50 days of the signing of any agreement; the parties note that the credibility of a plan on deficit

reduction depends on its long-term deliverability, not just the depth of immediate cuts. New

forecasts of growth and borrowing should be made by an independent Office for Budget

Responsibility for this emergency budget.

The parties agree that modest cuts of £6 billion to non-front line services can be made within the

financial year 2010-11, subject to advice from the Treasury and the Bank of England on their

feasibility and advisability. Some proportion of these savings can be used to support jobs, for

example through the cancelling of some backdated demands for business rates. Other policies upon

which we are agreed will further support job creation and green investment, such as work

programmes for the unemployed and a green deal for energy efficiency investment.

The parties agree that reductions can be made to the Child Trust Fund and tax credits for higher

earners.

2. Spending Review - NHS, Schools and a Fairer Society

The parties agree that a full Spending Review should be held, reporting this Autumn, following a

fully consultative process involving all tiers of government and the private sector.

The parties agree that funding for the NHS should increase in real terms in each year of the

Parliament, while recognising the impact this decision would have on other departments. The target

of spending 0.7% of GNI on overseas aid will also remain in place.

We will fund a significant premium for disadvantaged pupils from outside the schools budget by

reductions in spending elsewhere.

2

The parties commit to holding a full Strategic Security and Defence Review alongside the Spending

Review with strong involvement of the Treasury.

The Government will be committed to the maintenance of Britain's nuclear deterrent, and have

agreed that the renewal of Trident should be scrutinised to ensure value for money. Liberal

Democrats will continue to make the case for alternatives. We will immediately play a strong role

in the Nuclear Non-Proliferation Treaty Review Conference, and press for continued progress on

multilateral disarmament.

The parties commit to establishing an independent commission to review the long term affordability

of public sector pensions, while protecting accrued rights.

We will restore the earnings link for the basic state pension from April 2011 with a "triple

guarantee" that pensions are raised by the higher of earnings, prices or 2.5%, as proposed by the

Liberal Democrats.

3. Tax Measures

The parties agree that the personal allowance for income tax should be increased in order to help

lower and middle income earners. We agree to announce in the first Budget a substantial increase in

the personal allowance from April 2011, with the benefits focused on those with lower and middle

incomes. This will be funded with the money that would have been used to pay for the increase in

Employee National Insurance thresholds proposed by the Conservatives, as well as revenues from

increases in Capital Gains Tax rates for non-business assets as described below. The increase in

Employer National Insurance thresholds proposed by the Conservatives will go ahead in order to

stop Labour's jobs tax. We also agree to a longer term policy objective of further increasing the

personal allowance to £10,000, making further real terms steps each year towards this objective.

We agree that this should take priority over other tax cuts, including cuts to Inheritance Tax. We

also agree that provision will be made for Liberal Democrat MPs to abstain on budget resolutions to

introduce transferable tax allowances for married couples without prejudice to this coalition

agreement.

The parties agree that a switch should be made to a per-plane, rather than per-passenger duty; a

proportion of any increased revenues over time will be used to help fund increases in the personal

allowance.

We further agree to seek a detailed agreement on taxing non-business capital gains at rates similar

or close to those applied to income, with generous exemptions for entrepreneurial business

activities.

The parties agree that tackling tax avoidance is essential for the new government, and that all efforts

will be made to do so, including detailed development of Liberal Democrat proposals.

4. Banking Reform

The parties agree that reform to the banking system is essential to avoid a repeat of Labour's

financial crisis, to promote a competitive economy, to sustain the recovery and to protect and

sustain jobs.

We agree that a banking levy will be introduced. We will seek a detailed agreement on

implementation.

3

We agree to bring forward detailed proposals for robust action to tackle unacceptable bonuses in the

financial services sector; in developing these proposals, we will ensure they are effective in

reducing risk.

We agree to bring forward detailed proposals to foster diversity, promote mutuals and create a more

competitive banking industry.

We agree that ensuring the flow of credit to viable SMEs is essential for supporting growth and

should be a core priority for a new government, and we will work together to develop effective

proposals to do so. This will include consideration of both a major loan guarantee scheme and the

use of net lending targets for the nationalised banks.

The parties wish to reduce systemic risk in the banking system and will establish an independent

commission to investigate the complex issue of separating retail and investment banking in a

sustainable way; while recognising that this would take time to get right, the commission will be

given an initial time frame of one year to report.

The parties agree that the regulatory system needs reform to avoid a repeat of Labour's financial

crisis. We agree to bring forward proposals to give the Bank of England control of macro-prudential

regulation and oversight of micro-prudential regulation.

The parties also agree to rule out joining the European Single Currency during the duration of this

agreement.

5. Immigration

We have agreed that there should be an annual limit on the number of non-EU economic migrants

admitted into the UK to live and work. We will consider jointly the mechanism for implementing

the limit. We will end the detention of children for immigration purposes.

6. Political Reform

The parties agree to the establishment of five year fixed-term parliaments. A Conservative-Liberal

Democrat coalition government will put a binding motion before the House of Commons in the first

days following this agreement stating that the next general election will be held on the first

Thursday of May 2015. Following this motion, legislation will be brought forward to make

provision for fixed term parliaments of five years. This legislation will also provide for dissolution

if 55% or more of the House votes in favour.

The parties will bring forward a Referendum Bill on electoral reform, which includes provision for

the introduction of the Alternative Vote in the event of a positive result in the referendum, as well

as for the creation of fewer and more equal sized constituencies. Both parties will whip their

Parliamentary Parties in both Houses to support a simple majority referendum on the Alternative

Vote, without prejudice to the positions parties will take during such a referendum.

The parties will bring forward early legislation to introduce a power of recall, allowing voters to

force a by-election where an MP was found to have engaged in serious wrongdoing and having had

a petition calling for a by-election signed by 10% of his or her constituents.

We agree to establish a committee to bring forward proposals for a wholly or mainly elected upper

chamber on the basis of proportional representation. The committee will come forward with a draft

motions by December 2010. It is likely that this bill will advocate single long terms of office. It is

4

also likely there will be a grandfathering system for current Lords. In the interim, Lords

appointments will be made with the objective of creating a second chamber reflective of the share

of the vote secured by the political parties in the last general election.

The parties will bring forward the proposals of the Wright Committee for reform to the House of

Commons in full - starting with the proposed committee for management of programmed business

and including government business within its scope by the third year of the Parliament.

The parties agree to reduce electoral fraud by speeding up the implementation of individual voter

registration.

We have agreed to establish a commission to consider the 'West Lothian question'.

The parties agree to the implementation of the Calman Commission proposals and the offer of a

referendum on further Welsh devolution.

The parties will tackle lobbying through introducing a statutory register of lobbyists. We also agree

to pursue a detailed agreement on limiting donations and reforming party funding in order to

remove big money from politics.

The parties will promote the radical devolution of power and greater financial autonomy to local

government and community groups. This will include a full review of local government finance.

7. Pensions and Welfare

The parties agree to phase out the default retirement age and hold a review to set the date at which

the state pension age starts to rise to 66, although it will not be sooner than 2016 for men and 2020

for women. We agree to end the rules requiring compulsory annuitisation at 75.

We agree to implement the Parliamentary and Health Ombudsman's recommendation to make fair

and transparent payments to Equitable Life policy holders, through an independent payment

scheme, for their relative loss as a consequence of regulatory failure.

The parties agree to end all existing welfare to work programmes and to create a single welfare to

work programme to help all unemployed people get back into work.

We agree that Jobseeker's Allowance claimants facing the most significant barriers to work should

be referred to the aforementioned newly created welfare to work programme immediately, not after

12 months as is currently the case. We agree that Jobseeker's Allowance claimants aged under 25

should be referred to the programme after a maximum of six months.

The parties agree to realign contracts with welfare to work service providers to reflect more closely

the results they achieve in getting people back into work.

We agree that the funding mechanism used by government to finance welfare to work programmes

should be reformed to reflect the fact that initial investment delivers later savings in lower benefit

expenditure.

We agree that receipt of benefits for those able to work should be conditional on the willingness to

work.

5

8. Education

Schools

We agree to promote the reform of schools in order to ensure:

• that new providers can enter the state school system in response to parental demand;
• that all schools have greater freedom over curriculum; and,
• that all schools are held properly accountable.

Higher education

We await Lord Browne's final report into higher education funding, and will judge its proposals

against the need to:

• increase social mobility;
• take into account the impact on student debt;
• ensure a properly funded university sector;
• improve the quality of teaching;
• advance scholarship; and,
• attract a higher proportion of students from disadvantaged backgrounds.

If the response of the Government to Lord Browne's report is one that Liberal Democrats cannot

accept, then arrangements will be made to enable Liberal Democrat MPs to abstain in any vote.

9. Relations with the EU

We agree that the British Government will be a positive participant in the European Union, playing

a strong and positive role with our partners, with the goal of ensuring that all the nations of Europe

are equipped to face the challenges of the 21st century: global competitiveness, global warming and

global poverty.

We agree that there should be no further transfer of sovereignty or powers over the course of the

next Parliament. We will examine the balance of the EU's existing competences and will, in

particular, work to limit the application of the Working Time Directive in the United Kingdom.

We agree that we will amend the 1972 European Communities Act so that any proposed future

Treaty that transferred areas of power, or competences, would be subject to a referendum on that

Treaty - a 'referendum lock'. We will amend the 1972 European Communities Act so that the use

of any passerelle would require primary legislation.

We will examine the case for a United Kingdom Sovereignty Bill to make it clear that ultimate

authority remains with Parliament.

We agree that Britain will not join or prepare to join the Euro in this Parliament.

We agree that we will strongly defend the UK's national interests in the forthcoming EU budget

negotiations and that the EU budget should only focus on those areas where the EU can add value.

We agree that we will press for the European Parliament only to have one seat, in Brussels.

We agree that we will approach forthcoming legislation in the area of criminal justice on a case by

case basis, with a view to maximising our country's security, protecting Britain's civil liberties and

6

preserving the integrity of our criminal justice system. Britain will not participate in the

establishment of any European Public Prosecutor.

10. Civil liberties

The parties agree to implement a full programme of measures to reverse the substantial erosion of

civil liberties under the Labour Government and roll back state intrusion.

This will include:

• A Freedom or Great Repeal Bill.
• The scrapping of ID card scheme, the National Identity register, the next generation of

biometric passports and the Contact Point Database.

• Outlawing the finger-printing of children at school without parental permission.
• The extension of the scope of the Freedom of Information Act to provide greater

transparency.

• Adopting the protections of the Scottish model for the DNA database.
• The protection of historic freedoms through the defence of trial by jury.
• The restoration of rights to non-violent protest.
• The review of libel laws to protect freedom of speech.
• Safeguards against the misuse of anti-terrorism legislation.
• Further regulation of CCTV.
• Ending of storage of internet and email records without good reason.
• A new mechanism to prevent the proliferation of unnecessary new criminal offences.

11. Environment

The parties agree to implement a full programme of measures to fulfil our joint ambitions for a low

carbon and eco-friendly economy, including:

• The establishment of a smart grid and the roll-out of smart meters.
• The full establishment of feed-in tariff systems in electricity - as well as the maintenance of

banded ROCs.

• Measures to promote a huge increase in energy from waste through anaerobic digestion.
• The creation of green investment bank.
• The provision of home energy improvement paid for by the savings from lower energy bills.
• Retention of energy performance certificates while scrapping HIPs.
• Measures to encourage marine energy.
• The establishment of an emissions performance standard that will prevent coal-fired power

stations being built unless they are equipped with sufficient CCS to meet the emissions

performance standard.

• The establishment of a high-speed rail network.

7

• The cancellation of the third runway at Heathrow.
• The refusal of additional runways at Gatwick and Stansted.
• The replacement of the Air Passenger Duty with a per flight duty.
• The provision of a floor price for carbon, as well as efforts to persuade the EU to move

towards full auctioning of ETS permits.

• Measures to make the import or possession of illegal timber a criminal offence.
• Measures to promote green spaces and wildlife corridors in order to halt the loss of habitats

and restore biodiversity.

• Mandating a national recharging network for electric and plug-in hybrid vehicles.
• Continuation of the present Government's proposals for public sector investment in CCS

technology for four coal-fired power stations; and a specific commitment to reduce central

government carbon emissions by 10 per cent within 12 months.

• We are agreed that we would seek to increase the target for energy from renewable sources,

subject to the advice of the Climate Change Committee.

Liberal Democrats have long opposed any new nuclear construction. Conservatives, by contrast, are

committed to allowing the replacement of existing nuclear power stations provided they are subject

to the normal planning process for major projects (under a new national planning statement) and

provided also that they receive no public subsidy.

We have agreed a process that will allow Liberal Democrats to maintain their opposition to nuclear

power while permitting the government to bring forward the national planning statement for

ratification by Parliament so that new nuclear construction becomes possible.

This process will involve:

• the government completing the drafting of a national planning statement and putting it

before Parliament;

• specific agreement that a Liberal Democrat spokesman will speak against the planning

statement, but that Liberal Democrat MPs will abstain; and

• clarity that this will not be regarded as an issue of confidence