U.K. Coalition Seeks to Curb Damage From Resignation of Chief Secretary

Leaders of the U.K.’s three-week-old coalition government sought to limit political damage from their first crisis and preserve their deficit-cutting plans after Chief Secretary to the Treasury David Laws resigned over revelations about his parliamentary expenses.

Laws, a Liberal Democrat, stepped down May 29 after the Daily Telegraph reported he’d claimed more than 40,000 pounds ($58,000) in expenses for renting a room from his long-term partner. Laws, 44, was a key negotiator in forming the nation’s Conservative-Liberal Democrat partnership and had been charged with finding cuts to public spending to tackle Britain’s 156 billion-pound fiscal deficit.

Prime Minister David Cameron described Laws as a “good and honorable man” in a letter accepting his resignation. “In your short time at the Treasury, you have made a real difference, setting the Government on the right path to tackle the deficit which poses such a risk to our economy,” Cameron wrote.

Cameron’s government is seeking to reassure investors it is serious about reducing a deficit that swelled to 11.1 percent of the U.K.’s gross domestic product in the fiscal year ended in March, the highest since World War II. The government on May 25 promised to accelerate a reduction of the structural deficit, estimated by the previous Labour government to be 69 billion pounds, with spending cuts taking the strain.

Danny Alexander

Laws is being replaced as Treasury Chief Secretary by Scotland Secretary Danny Alexander, 38, a former chief of staff to Liberal Democrat leader and Deputy Prime Minister Nick Clegg. Alexander worked in press relations before being elected to Parliament in 2005.

The Daily Telegraph reported today that Alexander had made use of a legal loophole to avoid paying capital gains tax when he sold a taxpayer-funded apartment in London in 2007; Alexander told the newspaper he had used the loophole, which was legal.

Alexander will follow the agreement made by the coalition to make spending cuts, Deutsche Bank chief U.K. economist George Buckley said yesterday.

Alexander said he is “absolutely committed to taking the necessary steps to address the deficit rapidly,” the Financial Times reported. There will be no alteration to any aspect of the plans for spending curbs, newspaper reported an aide to the U.K. prime minister as saying.

“It’s not going to mean a great deal of difference in what’s going to happen on spending cuts and deficit reduction,” Buckley said. “It’s not like Alexander’s going to change what would have happened under David Laws.”

Conservative Chancellor of the Exchequer George Osborne is “is setting the agenda and these guys are simply looking for where the savings can be made,” Buckley said.

The resignation may have strengthened Osborne’s hand in forcing through cuts, according to Justin Fisher, professor of Politics at London’s Brunel University.

“The Liberal Democrats are in a weaker position because they’ve done damage to the coalition,” Fisher said in a phone interview yesterday. “They’re not in a position to say ‘hang on a minute’. It gives George Osborne the upper hand.”

Pound Falls

The pound has fallen 11 percent against the dollar this year amid concern the government will struggle to narrow the deficit. It traded for $1.4448 as of 8:12 a.m. London time today.

Laws is one of the most hawkish on the deficit in the Liberal Democrat Party, and there is “respect” for him as an economic thinker among Conservatives, said Andrew Russell, who teaches politics at Manchester University and is author of ‘Neither Left Nor Right,’ a history of the Liberal Democrats.

“Laws is one of the few in the Parliamentary Liberal Democrat party for whom the Conservatives would have seemed a natural coalition partner,” Russell said in a telephone interview yesterday. “Both coalition partners need each other so I don’t think it’s about to fall, but Laws was one of the lynchpins holding the thing together, and it does damage the long-term prospects of the coalition.”

The appointment of Alexander as the new Chief Secretary may upset some Conservative lawmakers who think they are better qualified, Russell said. They may think Alexander is being rewarded for his part in the negotiations that formed the coalition rather than his aptitude for the job, Russell said.

In a statement late May 28, Laws, a former head of Dollar and Sterling treasuries at Barclays de Zoete Wedd Ltd., apologized for claiming expenses to share a home with his male partner and said that he will repay the money.

‘Relationship’

“I’ve been involved in a relationship with James Lundie since around 2001, about two years after first moving in with him,” Laws said in the statement issued through the Press Association after the Daily Telegraph reported that he used public money to pay rent to Lundie. “Our relationship has been unknown to both family and friends throughout that time.”

Laws said “at no point” did he consider himself to be in breach of parliamentary rules that define a partner as “one of a couple” who live together and treat each other as spouses.

To contact the reporter on this story: Thomas Penny in London at tpenny@bloomberg.net

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