Speech By Liberal Democrat Shadow Chancellor, Vincent Cable MP

Speech by Vincent Cable MP delivered to Liberal Democrat Federal Conference on Mon 20th Sep 2004

Introduction

Last year we lost one of the great Liberal Democrats and the last to serve as Chancellor: Roy Jenkins. In one of his fine biographies he describes Gladstone's 1860 budget. It was a speech - for Gladstone - of unusual brevity: a mere 4 hours. Roy notes approvingly that he cut duties on French wine in the interests of European free trade. But Gladstone had two main concerns: balancing the budget after a costly war and with simpler and fairer taxes, cutting many duties on what he called the 'working man', preferring to tax the wealthy.

My priorities as Shadow Chancellor today maintain Gladstone's liberal tradition.

There are painful economic realities. Budgets have to add up. Choices are needed in public spending. People want fairer taxes, not ever rising taxes, and they want value for money.

Our response has been to prepare a costed programme for government. The Liberal Democrat pre manifesto for the General Election is to be debated at Conference tomorrow. My role in that process is often to say "no". Indeed where people used to ask "Dr Who"? they now say "Ah, Dr No". But I take heart from our Liberal Democrat councillors around the country. Many have inherited badly run spend thrift Labour authorities. All face hard budget constraints. They are discovering that progressive politics involves financial discipline and tough choices.

And I think the electorate will respect candour. Letwin and Brown are promising miraculously large sums in tax cuts or public spending entirely financed by 'eliminating waste'. I wish. I came into politics from private industry; and the government could learn a lot about cutting costs. But I suspect the electorate is suffering from 'miracle fatigue' and shares my scepticism. It is just not this easy. We aim to be by contrast, more concrete, more modest and more honest.

Fairness & Liberalism

Economic discipline and credibility are essential. But we intend to balance these economic imperatives with greater social justice. When I worked with Gordon Brown on the Red Papers for Scotland 30 years ago I never imagined then that after almost eight years of Labour Government, under his Chancellorship: inequality of income and wealth would be as bad or higher than under Mrs Thatcher; the poorest fifth of the population would pay a higher percentage of their income in tax than the richest fifth; and that 'fat cats' in failed companies would be able to award themselves million in payoffs and bonuses while hardworking, thrifty people could see their savings and pensions wrecked or stolen. Labour's record is miserable. We could do better.

Our commitment to social justice is reinforced by a firm commitment to liberal economic policies: economic freedom. Without wealth creation there is no wealth to spread. That is why I emphasise the traditional liberal message - from Adam Smith to today - that markets must be allowed to work; trade should be free; private enterprise should not be shackled by excessive regulation; and private and state monopolies should be opened up to competition. Yet, damaging state intervention abounds: from the ruinous and immoral Common Agricultural Policy to the bureaucratic and illiberal Working Time Directive and subsidies to nuclear power and arms exporters: What I call the industrial welfare state.

Stability and the Debt Bubble

Economic freedom is not the same as a free for all: a mistake the Conservatives made. They unleashed an unsustainable economic boom which collapsed, such that their reputation for economic competence remains in ruins to this day.

Gordon Brown has done better, so far. He adopted the Lib Dem policy of an independent Bank of England to set interest rates. And he has followed fiscal rules, cutting government debt. Like the Good Lord in the Book of Genesis he created a new economic world in seven days. But he has spent the last seven years admiring his own creation. Meanwhile the Devil has been at work. An orgy of debt financed household spending has generated a trillion pounds of debt; most of it is secured against a financial 'bubble' in the housing market. As a result numerous young families cannot get onto the housing ladder and those that do have to face negative equity if, or when, the bubble bursts.

It may not happen. I seriously hope not. But the Chancellor is taking serious risks by relying solely on the Bank of England's use of interest rates to achieve what is called a 'soft landing'. I admire the Governor and his colleagues. But when an overloaded aircraft tries to land at night in fog on a strange airfield the chances of disaster are high.

Global Risks

Policies for economic stability are now more essential, since the world economy, in my view, is teetering on the edge of a major economic shock. One reason is the price of oil. The problem is not caused, as Gordon Brown claims, by OPEC restricting supply; there is genuinely a serious shortage of capacity.

A British government less given to vanity and to lecturing the rest of the world on the brilliance of its economic achievements would see the dangers and prepare for them. They would see the connection between the economy and the environment: that curbing excessive energy demand is necessary for our economy our security and the future of the planet. Conservation, not complacency, is required.

Tough Choices

Turning now to the budget, at the last general election we argued that a key priority was to support under funded public services like the NHS and to finance that expansion, honestly, through taxation. The government raised taxes - stealthily. We supported the extra funding, and we voted for it. At Conference last year we pledged that future spending commitments should not rely on higher general taxation but on savings elsewhere in government. We pledged to find £5 billion per year to meet our priorities, notably education, pensions and policing.

The biggest new financial outlay is to provide a decent state pension. What we can afford is a generous pension to all men and women over 75, earnings linked and not means tested. There is now a growing consensus, everywhere except in Downing Street that we have to move away from means testing since millions do not claim it and live in poverty. While those that do, have little incentive to save. We have put forward a practical, affordable alternative.

Then we want to develop our long standing commitment to education. We want to see primary school class sizes brought down further; and investment in training, particularly science and maths teachers who are in alarmingly short supply. There are far better ways of investing in young people than the Government's Baby Bond scheme. It is absurd to commit £250m a year of taxpayers' money for a system of long term savings when young people are being led by Government policy into excessive debt.

I don't pretend that it is easy to take a large chunk out of government spending departments. We have suggested, for example, dismantling the DTI. The DTI does some useful things, like financing non-commercial 'blue skies' scientific research. These activities should continue, elsewhere in government. But serious cuts would have to be made in old fashioned bailouts. The vast majority of businesses do not, in my experience, demand nor need government help. They already live in the Land of Tough Choices. As a leading entrepreneur told Mrs Hewitt recently: "please stop trying to help us; stop interfering and let us get on with our job."

Fairer Taxes and Tax Reform

Nor are there soft options in relation to taxation. This country doesn't need or want higher taxes. But people want the burden distributed more fairly.

That is why we advocate scrapping council tax and replacing it with LIT on the model which operates efficiently in Denmark, Sweden, Switzerland and the USA. That is also why we argue for a higher 50% rate on earnings over £100,000 pa. This revenue will enable us to abolish tuition fees and top-up fees, introduce free personal care helping people with long term diseases like Parkinson's or Alzheimer's and hold down local taxation.

It speaks volumes for the priorities of the present Prime Minister that he denounces as dangerously radical the same 50% tax rate: a rate which Nigel Lawson in his memoirs tells us that even Margaret Thatcher was happy to live with.

Blair defends or ignores higher marginal tax rates on those on modest incomes: a 50% rate currently paid by pensioners on pension credit; a 50% rate on middle income families after the new student fee repayment obligations; and a 60% rate on low paid workers - as much as 90% for those caught in the benefit trap. Perhaps we should not be surprised that our Prime Minister doesn't understand the economics of poverty when he prefers to spend his quality time with Silvio Berlusconi and George Bush.

We believe that too many people on modest income pay too much tax. Under our proposals for taxation and public spending 70% of tax payers would pay less tax than they do at present.

The Alternatives

What are the alternatives?

The Conservatives, in particular, are reluctant to face difficult choices on spending and taxation.

My Conservative opposite number is Oliver Letwin - a delightful and undoubtedly clever man. He established his reputation as a financial wizard while he was the Tory Home Affairs spokesman. He came up with the idea of saving £2 billion a year by shipping out asylum seekers to a remote island.

Let's just think about it. Round up our asylum seekers - most of them currently working and paying tax. Buy - or lease - an island, somewhere. Build camps to house them. Ship them out. Send their lawyers and relatives backwards and forwards. And save £2 billion?

This brainwave deserves to be expressed in mathematical form. Take x, y and z, all positive numbers. Solve the equation where x + y + z = minus 2 billion. This is so original it should be called the Howard-Letwin Theorem. Suffice to say nobody has yet solved it.

After this fiasco, Oliver has moved on to bigger things. At his party conference in two weeks, I predict that he will offer some mouth-watering tax cuts to Middle England.

He will tell us that he is going to cut waste, billions and billions of it. Of course, genuine waste must be eliminated but it should not be an excuse to duck tough choices. When Oliver Letwin and Michael Howard talk about government waste I am reminded of the old story of the economist stranded on a desert island with tins of food and nothing else. Asked how he is going to eat, he thinks carefully and comes up with a solution - "Let us assume the existence of a tin opener". The Tory tin opener is waste. By assuming vast savings from waste they can spend more, cut taxes and balance the budget. Brilliant! Why did no one think of it before?

They did. Campaigns against "waste" have been the last refuge of Tory politicians without policies or priorities through the ages.

Now Gordon Brown has joined in, he promises to match any the Tories can come up with. But since the promised efficiency is never defined let alone measured, so this increasingly resembles a competition in who can nail the most jelly to a wall.

And, of course, when Brown and Letwin talk about waste they forget that they both supported the Iraq war which has cost the taxpayer over £3.5 billion to date, and rising.

Conclusion

The debate should be about more than waste. It should be about our vision of the future.

I reject the old stereotypes of 'left and right'. I don't accept the socialist doctrine that while we can have more fairness in tax and better funded public services the package must also include more bureaucracy and government regulation and centralisation: this obsessive Labour belief, New or Old, that the Man in Whitehall (usually it is a man) always knows best.

I reject also the assumption of the Right that if we have a liberal economy - markets, competition, free enterprise - we must accept that there is no such thing as society; that we must have widening inequality and a free for all where the vulnerable are trampled underfoot.

They are both wrong. I believe we can have both a liberal and fair economy; better public services and tax cuts for the less well off, strong growth, with tough financial discipline. Our Britain, a Lib Dem Britain, would be a country which embraces economic freedom and social justice.