The Liberal Democrats 2004 Budget

Speech by Vincent Cable MP delivered to Bloomberg in the City on Thu 4th Mar 2004

Following on from Charles speech I want to make a few general remarks and then be more specific on the tough choices in public spending.

Our approach to the economy and this year's budget starts from the need for stability and financial discipline.

We advocated an independent Bank of England and a framework of fiscal rules before Gordon Brown and long before the Conservatives.

The present government economic framework and policy record is an improvement on Tory "boom and bust." But there are still some big worries.

The economy is seriously unbalanced.

Our views on escalating consumer debt have been set out elsewhere in more depth and I have put forward a ten point programme to address it.

To recap briefly, bankruptcies are at their highest rate since 1993 - which is their third highest rate since the current figures began in the mid 1980s.

Household debt is much higher in relation to incomes than at the height of the 1980s boom, and the Bank of England and many others are seriously worried about the house price bubble.

[CHART 1] Large numbers of families are now exposed to the risk of financial disaster if interest rates rise and house prices start to fall.

Combined with the current level of the pound [CHART 2]- which is now at its highest rate since the early 1980s (and higher than at the time of exit from the ERM) the imbalances in the economy are serious and manufacturing investment is still a disaster area [CHART 3].

Liberal Democrat arguments about the value of Euro entry at competitive exchange rate are still highly relevant.

In relation to tax and spending we believe that, with the current level of public spending there is no need for a general increase in taxation.

Nor is there a public appetite for US style tax cutting at the expense of services.

We believe the more important tax issues are fairness and simplicity.

As regards fairness our response is to replace Council Tax by Local Income Tax and, as we have made clear for some time, introduce a 50% rate of tax on incomes over £100,000 a year to finance the reduction of unfair charges and taxes.

We have aspirations to lift more low income earners and pensioners out of tax and will present details following our tax review.

This review will also allow us to address the issue of the extreme and growing complexity of the tax system which is once of Gordon Brown's defining legacies and a major burden on business and individuals.

Under Brown, two separate tax empires -Customs and the Inland Revenue- employ 86,000 and cost £4 billion to run.

Our broad vision of the public finances is that the overall proportion of national income the government spends is currently roughly right - and we would not intend to change it significantly in the medium term.

It is currently mid range of industrial countries which suggests a comfortable balance of collective provision and individual choice. [Chart 4].

But to build in discipline we need a new fiscal rule keeping the public spending to GDP ratio stable over a cycle. At the current rate of economic growth that means public spending rising at 2.5-2.75 per annum as against 1.5 % per annum under the Tories.

There is no fiscal crisis at present. But, apart from the trend growth issues, we need some adjustment to reduce the fiscal deficit reflecting the medium term warnings from independent organisations like the IMF and the OECD.

We propose two solutions.

Firstly an independent audit of the public sector finances, just as the Congressional Budget Office in the United States makes it very difficult for governments to fudge their figures.

This would mean higher bond market confidence and lower interest rates for the government. At present monetary policy is credible but fiscal policy is not because it is over dependent on the Treasury's self assessment of its own performance.

Secondly we endorse the principles underlying the Gershon review - and would bank the long term savings made by it as reductions of the deficit.

In other words a commitment to achieve a significant part of the identified efficiency gains would head off the risk of a growing deficit and help slow spending growth to stabilise the spending to GDP ratio.

We do not believe, however as the Tories seem to, that these savings will be easy, instant or on a vast scale - so to fund our public services priorities we have put forward today some tough choices on public spending.

The Tories have not yet made a single credible change in spending priorities. Their figures imply deep cuts in defence and law and order, transport and a big rise in council tax, but these are being concealed beneath generalised waffle about 'waste' [Chart 5].

Of course we must eliminate genuine waste. That is why we subscribe to the Gershon review, but note that it is requires a big cultural change in government in controversial areas like outsourcing and procurement.

The history of government IT systems suggests that the problems are deep and that there are no easy pickings. I have argued in Computer Weekly that radical changes including legislation will be needed to improve the methodology.

More generally, while good business practice must be brought into government departments politicians can't just leave this issue to the technocrats. For example Gershon savings will rely heavily on outsourcing.

Some public sector outsourcing will inevitably be over seas. Unlike my Conservative opposite number who is currently beating a protectionist drum on outsourcing, I accept that free trade applies to public as well as private procurement.

While it is important to set out how government could be made more efficient it is also necessary to spell out programmes which could be cut: what government should do less of and spend less on.

Taking tough choices on public spending is central to our strategy.

As Charles has set out we will announce the precise figures later on in the year, after the Chancellor's spending review sets out the government budget for 2005/6 to 2007/8.

However today we can set out some of the elements that will pay for the public spending priorities that Charles has mentioned. These are the sticks. The carrots follow:

Significantly the Conservatives have suggested none of our cuts and have pandered instead to vested interests:

[Chart 6]

· I have already publicised and had agreed by Party Conference the scrapping of the DTI. This is not a cosmetic change. We would drastically cut its budget for industrial support and bailouts by up to £7.5bn over the life of a parliament - recognising that some of this assistance is politically popular.

· We have opposed in Parliament that Chancellor's Child Trust Fund costing £1.25 billion over a life time of a Parliament. We believe a much better way to help the next generation is to put the money into early years education.

· Liberal Democrats strongly oppose Tory approach of old style indiscriminate defence spending cuts which would have the effect of leaving armed forces under equipped and under trained. But tough choices need to be made - some commitments like the third traunch of the Eurofighter programme should be reviewed, this alone could amount to a one off saving of around £2 billion. Some of these resources could be ploughed back into making sure the armed forces are properly equipped, trained and housed.

· As the Haskins report has identified DEFRA is a bloated, inefficient government department many of its 13,000 plus civil servants duplicate and augment the bureaucratic structures of the European CAP. Deep cuts are called for in programmes and staff.

· ID cards - up to £1.5bn saved by not introducing ID cards. That money would, we believe, be better spent on increasing the number of police on our streets and providing them with the latest technology to make them more efficient. ID cards may be popular but they are bad value for money.

· Prisons - Selling off city centre sites where the buildings are old and incapable of supporting constructive regimes for offenders, while commissioning new PFI prisons to replace them, saving up to £500m over a Parliament. We would also take action to reduce prison numbers by promoting intensive community service and electronic tagging."

Further although we have no Thatcherite ideological obsession with privatisation we have no difficulty with the idea of selling off assets that would be better placed in the private sector.

We are looking at all public sector assets and a list would include:

· The Royal Mint

· The Defence Export Services Organisation

· British Trade International

· The remaining Motorway Service Station assets

· Queen Elizabeth II conference centre - even with the entrance above the Whitehall bunker it should be possible to sell it!

We would also sell the Export Credit Guarantees Department if possible - if not we would require it to reach a fully commercial return on its assets - ending the implicit subsidy of several hundred million pounds a year, much of which goes to the defence industry.

[Chart 7]

Tough choices are not just a one off set of decisions. Long term issues need to be faced if more resources continue to have to be found for priority spending.

· The vast and largely uncontrolled cost of procurement, particularly defence, needs to be curbed. We believe we have to abandon the idea that procurement should serve the needs of industrial policy and move towards 'off the shelf' purchases giving better value for money. Economic nationalism shouldn't get in the way of getting our forces the equipment they need at the best price.

· We would address the spiralling long term cost of public sector pensions - Currently liabilities for public sector pensions are equivalent to the national debt. There have to be competitive pay conditions to attract and retain quality staff. But pension benefits can be equivalent to an employer contribution of up to 20% of their salary - unheard of in the private sector. The problem in relation to police and the fire service are already acute. Options for reform include negotiated later retirement for some public servants.

· The enormous unmet need for investment in public transport and other infrastructure cannot be met without private capital. The taxpayer cannot foot the bill. There will have to be innovative systems of road user pricing including congestion charging and charges based on gains in land values to business from infrastructural improvements, as often happens in the United States.

· The Common Agricultural Policy is a continuing economic monstrosity. Reform is proceeding, but very slowly. We would move in the direction of ending production subsidies while supporting farmers' commitments to the public good through providing environmental and other benefits. If reform flags we may have to seek the radical option of a UK opt out from the CAP.

In addition, our overall approach to government including radical decentralisation would save money as well as improve delivery.

· We could cut the number of ministries and ministers. We have suggested cutting out four departments and over 40 ministers.

· A cull of quangos - with significant decentralisation we would be able to abolish many quangos. For instance we would have a single education and skills organisation reducing duplication in learning and skills by integrating the Learning and Skills Council with the Higher Education Funding Council and Regional Development Agencies.

· Decentralisation by relocation - not just of back office staff but also of policy staff. The current civil service assumption that it is only possible to employ skilled people in London is ridiculous - universities survive perfectly well outside the south east - so should government ministries. I have suggested moving the Treasury to Liverpool saving £500m over the life of a parliament on office rents and sending a powerful signal to our over centralised bureaucracy. Over £2.5 billion over the life of a Parliament could be saved on office rents along from a more active relocation policy.

· We would scrap many of the wasteful, centrally driven, Area based initiatives in the Office of the Deputy Prime Minister and DEFRA. For instance there are over 100 such initiatives in Cornwall alone - each requiring its own bureaucracy, plus the costs of coordination - even when their work is useful.

· As part of local government finance there are net saving of £1.4 billion over a parliament by cutting the system of council tax and council tax benefit as estimated by the Chartered Institute of Public Finance Accountants.

We set ourselves the initial target of saving 1% of the government budget every year. We have done that, and more, and have sketched out some ideas we will publish the details when the Chancellor has completed his spending review. We shall also point the way to bigger long term savings.

LIST OF CHARTS

1. Bankruptcies

2. Real exchange rate

3. Manufacturing investment

4. Spending / GDP versus other developed countries

5. Implied Tory cuts by Department

6. Summary of key spending reallocations

7. Privatisations

8. Longer term issues

9. Functions to decentralise