The Chancellor Must Avoid Spin and Ensure The Public Trusts The Governments Figures

9.05.00am GMT Wed 1st Dec 2004

Tomorrow the Chancellor will set out his Pre-Budget Report.

The pre-budget report increasingly bears the hallmarks of a mini-budget in itself. But with a General Election now looming, I also expect that tomorrow there will be equal interest in the underlying electoral benefits of what is being promised: the politics of the campaign will be ever present in the argument.

And no-one should be surprised by that.

While Iraq and the issue of trust will be the backdrop to this election; health, education, pensions, crime, the environment, tax - these are the issues which impact directly on voters` lives.

THE POLITICAL ECONOMY

When it comes to electoral success, the economic credibility of a political party is critical. Credibility on two fronts - both what it is promising and what it is expected to deliver.

Labour has a record to defend. This government has invested huge sums in the public services and taxes have had to go up to pay for them - just as the Liberal Democrats forecast at the last election would happen.

I welcome that investment. I have long argued for it. It`s just a shame that the Chancellor is frightened to be upfront about it.

He has raised that money by putting up taxes. He just won`t say so. Many of his tax rises have been stealth taxes. And even when he planned to raise national insurance, he couldn`t bring him self to admit it at the 2001 General Election.

And the truth about his stewardship of the economy is that, while he has done much that I agree with, he remains wedded to a dated, statist, target-obsessed, Whitehall-controlled model for our public services. What that has meant is that the public is not seeing the benefits in improvements to their schools and hospitals as a result of the huge sums of money which are being spent - as quickly as might have been expected.

As for the Conservatives, they too have a record - one which they would undoubtedly prefer that the public forgot: the sorry state of our public services after 18 years of Tory rule.

Let`s not forget that under the Conservatives there was economic boom and bust with two major recessions that caused massive distress, high unemployment, and large scale home repossessions.

This has been greatly improved in part by adopting the Liberal Democrat policy of macro economic stability underpinned by an independent Bank of England.

I`m a little perplexed by the Conservatives at the moment. They keep telling us things - just different things.

One minute we are being promised the possibility of tax cuts; the next we are told that cuts might not be possible; then we are told that Michael Howard would like to grant tax cuts; but he can`t exactly specify how. It`s a mess.

The truth is that Conservative economic thinking is all over the place.

They are terrified of their record and any suggestion that the public services aren`t safe in their hands.

And they are terrified of the wrath of the right wing press if they don`t promise to cut taxes, which, if they were honest, they know they can`t deliver.

We also have the alarming example of the Bush administration in the US which embarked on an unfunded tax cutting spree that has resulted in an unsustainable fiscal deficit and a collapse in the value of the dollar.

Is this what the Conservatives plan for Britain?

What we`ve got from the Conservatives is a muddle.

One minute they say they will match current Government spending on health and education. They unveil policies which would see taxpayers` money used to subsidise private healthcare - for those who can already afford to go private!

This is apparently all part of the `choice` agenda.

Conservatives like talking about choice - it saves them talking about delivery (or cuts).

Choice is one of those marketing words. No sensible person would refuse a `choice` - providing it`s a real choice. But when you are talking about the public services, what the Conservatives are offering is an illusion. It`s choice for the few who can already afford it at the expense of those who simply need a good school or hospital close to home. That, I believe, is a false choice.

Having agonised their way through tax cuts and the public services, the Conservatives then start to wrestle with how they are going to pay for expensive promises like linking pensions to earnings.

Here they offer just one solution. They will `cut back on waste`.

Cut back on waste.

How many times have I heard Conservative politicians make that pledge?

Of course genuine waste should be eliminated; no-one disagrees with that. But it`s scarcely credible when it`s presented as the only economic rabbit in the hat.

What the Conservatives have not been able to say is what they would actually cut in order to deliver lower overall public spending and lower taxes.

Last week, the Prime Minister attacked the Conservatives for `fantasy politics` - I would put it another way, I would call it the politics of desperation.

That is because the Conservatives are not aiming to win the next general election, they are campaigning only to survive - and they are willing to perpetrate any fraud to succeed in that.

By ducking the tough choices about where and what to cut, the Conservative party has a huge credibility gap when it comes to delivery.

The Liberal Democrats will take no lessons from a Conservative party which, perhaps 5 months before a General Election, is spinning lower taxation and higher spending on schools and hospitals but cannot say how it will balance the books.

My message to Michael Howard is this - if you want to take on the Lib Dems challenge - if Oliver Letwin wants to win his own seat - at least have offer a serious policy on tax and spend yourself.

ECONOMIC LIBERALISM - SOCIAL JUSTICE

So Labour and the Conservatives have problems with their record, with their promises and with trust in whether what they say is what they will actually do.

We Liberal Democrats are approaching these issues quite differently.

Throughout the Parliament I have set the Liberal Democrats the task of producing a tightly costed, clear and affordable programme for the British people - and I can tell you now how we will pay for it.

At the 2001 election, as Labour had failed to invest in our public services, we said clearly that `you can`t get something for nothing`. And we argued for an increase in public spending.

A huge increase in public expenditure is now being delivered - £200bn a year extra by 2005, compared with 1997.

Having won that argument, I am comfortable that it is time for a different emphasis. Today the public service battleground, for example, is about delivery.

That is why the spending priorities that we Liberal Democrats have set out have two key elements.

We start from the basis that we accept that for now the level of Government spending as a percentage of GDP is about right. We say there should be one small tax rise, for income earned over £100,000.

There are painful economic realities. Budgets have to add up. Tough choices are needed in public spending.

If we were in Government, we would therefore re-allocate £5 billion a year, re-prioritising it to spend in different ways.

This means scaling back specific Government expenditure programmes, reforming how Government works, slimming down Whitehall, and selling off unnecessary public assets.

And with the reallocated public money we can dramatically reduce means testing for pensions by providing a decent state pension, we can re-institute free eye and dental checks and put more police on the streets.

At our Conference we set out our plans in our pre-manifesto costings document.

I would like today to set out some of the economic thinking that underpins those decisions.

First - I want to be absolutely clear - we are a party of economic liberalism. We want people to keep as much of the money they earn as possible. But we are also a party of social justice, opportunity and fairness.

Without wealth creation, there is no wealth to spread. That is why our liberal tradition emphasises free trade and the opening up of both private and state monopolies to competition; allowing markets to work and freeing enterprise from the shackles of unnecessary regulation.

But economic liberalism is not the same as a free for all: which is the mistake that the Conservatives have made in the past.

Reform of the way our public services operate is key to improving the quality and capacity of our schools and hospitals.

But we cannot escape the fact that sustained, and sustainable, investment in our public services is central to providing quality local public services - accessible to all on the basis of need - not on the basis of how much people can afford. The British people instinctively understand this.

Taxation has often been described as a necessary evil.

I would argue differently. Moderate taxation in a liberal and democratic society can be a force for good - providing it is well spent. It allows Government to fulfil necessary functions such as the provision of safety and security, to tackle other threats to society such as environmental degradation, to provide the support structures we need while working towards the creation of opportunity for all.

In a liberal society, the battle against poverty can be taken forward by ensuring that through the law and through proper sustainable investment in services for all, no one is disadvantaged by accident of birth in making the best of their talents.

But that contract with the people - that the Government will only tax fairly and will spend their money wisely - can only be sustained if the political parties are straightforward about their plans.

With the stealth tax strategy of Gordon Brown, the obvious unfairness of our current tax system - especially the Council Tax, and the empty promises of the Conservative party on this issue - it is no wonder that trust in taxation is breaking down.

The Liberal Democrats have been consistently open with the British people about tax and in the coming General Election we are making it clear our commitment is to fairer and simpler tax - not higher levels of general taxation.

FAIR TAX - TOUGH CHOICES

Our programme, as I said earlier, includes one limited rise in Income Tax that will affect only those who earn over £100,000 - around 1% of taxpayers.

This ring fenced tax change - raising the top marginal rate of tax from 41% to 50% (including national insurance) on every pound earned over £100,000 - will provide the money to scrap top-up fees and tuition fees, provide free personal care for the elderly, and allow us to keep down the rate of local taxes.

This change in the tax system is affordable and sustainable. It represents a rise under half of one percent in the overall tax burden - which is hardly punitive.

And to those who say that a 50% top-rate of tax is unacceptable, I say this:

Firstly, it is inexplicable for a Government which claims to promote an agenda of social justice that the poorest 20% of the population pay a higher percentage of their income in tax than the richest 20%.

If we are to maintain trust in the tax system - fairness must be at its heart.

By its nature our tax system has redistribution at its core. But the balance must be struck at a level where rates are progressive not punitive, for both the well off and the poor.

Take the Council Tax - perhaps the most unfair tax that we currently all pay. As it is not based on the ability to pay - it is the poorest, especially pensioners - who feel the biggest bite from Council Tax.

Our proposal for a Local Income Tax to replace the Council Tax will not be pain free. But because it is based on income - those who earn the most will pay a little more while the majority of the population - around 70% of people will be better off or unaffected.

Secondly - many people are actually already paying or set to pay a 50% tax rate. But that tax burden is not falling on the wealthiest. It is pensioners on pension credit and middle income families who are helping repay new student fee obligations.

Thirdly, it is worth remembering that even Margaret Thatcher and Nigel Lawson were happy to live with a 60% rate for the majority of her period of Prime Minister.

We do have other proposals to reform the tax system. We have proposed a number of changes to environmental taxes. The principle here is that it is the polluter who pays.

For instance - why should each passenger on an airline pay air passenger duty when it is not the person that pollutes but the plane? If we switch to a tax on the plane and not on the passenger it would encourage a more efficient use of plane by airlines.

This is not a new tax on `cheap` holidays - a typically vacuous gibe from our opponents. Replacing old taxes with a better system is not imposing new taxes; it is making taxes fairer for people and more effective too.

Beyond our tax proposals, where we believe that more money is required for high priority front-line services, we will do it by cutting spending on low priority areas and by raising funds through changes in the way Government operates.

We have already identified £25bn that can be raised or reallocated within existing departmental budgets to pay for our pledges such as 10,000 more police and £25 rise in the pension for the over 75s.

BROWN`S TROUBLE - TRUST AND OPEN ECONOMICS

But of course it is not only the Conservatives who have been attempting to spin tax and spend.

Gordon Brown has genuine achievements to his credit. But they must not be undermined by yet another example of this Government`s tendency to exaggerate and mislead.

In order to avoid breaching his own `golden rule`, the Chancellor stands accused of trying to `redefine` the economic cycle in order to accommodate the deficit that is slowly building up.

Obviously setting taxes and public spending priorities cannot be contracted out by Government in the same way aspects of fiscal policy have been to the Bank of England.

But by withholding parts of his budgeting assumptions from the independent monitoring of the National Audit Office, the Chancellor is sowing the seeds of doubt that his forecasting - and therefore his tax and spending plans, are sustainable.

With the growing deficit and because of his reluctance to explain himself - there are rising assumptions that he may have to raise taxes if there is a Labour third term.

My colleague and Liberal Democrat Shadow Chancellor, Vince Cable has suggested a means of bringing openness to this process.

He proposes widening and strengthening the role of the National Audit Office so that it can report formally on the Government`s fiscal performance. Such a body could review whichever budget assumptions it sees fit with the object of keeping Parliament informed enabling it effectively to hold the Government to account.

If such independent monitoring is to be truly credible, the statistics underpinning its reports would also need to be fully credible. We are also therefore proposing that the Office of National Statistics should be independent of Government as well.

This Government has sought to undermine our civil liberties with the mantra, `if you have nothing to hide, you have nothing to fear` - and yet it refuses to open up its own books.

Double standards, just like the double counting the Chancellor is prone to, undermine public trust. That must not be allowed to go unchecked.

CONCLUSION

Britain needs an alternative to Labour, which is economically liberal but is also committed - as we are - to social justice and quality public services.

An alternative that is straightforward about taxation, and clear about its spending priorities.

When - as eventually it must - this Labour Government falls, I am determined that the Liberal Democrats will be the challengers.

Our liberal economic programme can be summarised as follows:

Economic stability and financial responsibility;

Tough choices in public spending;

Fair taxation;

And free enterprise.

And we want local people to have the power to decide their own needs, wherever possible.

The Liberal Democrat commitment to devolution of power is long established and widely understood.

Gladstone said that the principle of liberalism was trust in the people, only qualified by prudence. The illiberal principle was - mistrust of the people only qualified by fear.

I am determined that in the dying days of this parliament, the Liberal Democrats will hold Labour to account for its illiberalism.