In a speech to Demos, Liberal Democrat Shadow Chancellor Vince Cable will today set out the key pillars of the Liberal Democrat economic manifesto.

Vince Cable will say:

We have an economy too dependent on consumer spending and borrowing rather than saving and investment. Too much financial engineering in banking rather than real engineering. Too London-centric. Too dependent on the City of London rather than the talents of the rest of Britain. Too preoccupied with the artificial, paper wealth of inflated property prices rather than productive work and invention. Too absorbed by growth for its own sake rather than protecting the environment and maintaining a sense of fairness and community. But we don’t have to despair. The challenges are enormous but if we are prepared to face up to them we can use the current crisis to refashion our economy so that it serves the country not the just the square mile. That means making the sort of radical changes that we propose: a credible plan for bringing the public finances back under control, sorting out and breaking up the banks, building a sustained recovery and creating a fairer tax system.

The Liberal Democrats are the only party of genuine economic reform.

Bringing the Public finances back under control

What is absolutely clear is that the incoming Chancellor must have a clear plan to eliminate the structural deficit. The government keeps changing its definition of what and how big the structural deficit is but the common sense point is that public spending was built up on impermanent sources of tax and now needs to be scaled back to levels that the UK taxpayer can pay for. The current government estimate of 5.5% of GDP is a guess; it could be worse. The government plan to reduce this deficit by half over four years may also prove to be too laid back for the markets. It is however a starting point. It is also a major challenge and tough by the standards of previous fiscal tightening.

 

In recent weeks, the markets have been jittery about the outcome of the General Election and the uncertain aspect of its outcome on Government spending.  They are right to worry: the consequences of failure to bring the deficit under control are serious.  This cannot be allowed to happen – what we need is a credible plan to deal with the deficit and to be delivered by whatever Government is formed after the British public have had their say.

Let me be clear that bringing stability back to the public finances is an unambiguous commitment. For the Liberal Democrats it is the first pillar of our economic policy.

What is needed is a calm and rational plan, a proactive rather than reactive approach, identifying the priority steps which need to be taken to cut government spending. The Liberal Democrats have for a start put on hold many of our previous spending commitments – to free personal care, to a generous citizens pension, to universal child care – which are undoubtedly popular ideas but are not, now, affordable.

We have so far identified an additional £10bn in net savings beyond what the government has put forward which is, altogether, about half of what would be needed to meet the government’s deficit reduction objective. I do not hide the fact that much more would need to be done.

Sorting out and breaking up the banks

There is a big, structural, issue which until recently was being studiously avoided by both the Government and the Tories. Since the banking crisis broke in November 2008, I have argued that this question cannot be ducked since the British global, banks which are too big to fail are too big to bail out and are a danger to the systemic stability of the economy. Now that President Obama has taken on the issue of breaking up the banks on his side of the Pond, it is time that we do the same in the UK.   A modern version of Glass Steagall is required separating retail and investment banking and there is need too for more meaningful competition in business and mortgage lending. Until the banks are broken up, and are able to compete and succeed or fail without UK government guarantees, they should pay an insurance premium – a supplementary tax on bank profits.

Beyond that, there is need for a much more varied ecology in the banking industry: local banks; more mutuals including credit unions; a banking arm for the Post Office network to reach the financially excluded; specialist banks to support with long term finance, new ventures and for infrastructure.  I see, at present, no evidence that the Government or the Conservatives have any vision of banking beyond the immediate crisis.

 

Building a sustained recovery

A sustained recovery will rely on the private sector, especially small and medium sized business, to generate jobs. For this to be possible, government will have to help create a business environment conducive to start ups and small business – centring on moderate taxes, getting rid of red tape, secure intellectual property rights and ensuring that there is a flow of credit on competitive terms. Beyond that most entrepreneurs want to be left alone. But there are several respects in which government has to give a lead to underpin stable, sustainable growth in future and this is the next pillar of our economic policy.

The first element is to provide, where possible, economic stability. Gordon Brown’s ‘abolition’ of ‘boom and bust’ has become his signature: and a joke. We must maintain the operational independence of the Bank of England. Its terms of reference must now include management of asset inflation, as in the case in Sweden. We also need greater independence in the monitoring and assessment of fiscal policy.

 

A second key role is education. A key priority for the Lib Dems is to reallocate some of the financial savings made to reinvest in early years education of the most deprived children so that there is a reduction in the apparently endless cycle of educational failure for those at the bottom. Another priority must be science and maths education at all levels leading also to engineering.

The third is the financing of capital investment in infrastructure, in the widest sense. Britain has, on most measures, poor infrastructure. There is a need for substantial investment in energy networks and storage, public transport systems and new renewable energy. We want to create an Infrastructure Bank, with some pump priming, public money (or assets) but essentially privately financed.

 

Creating a fairer tax system

It could be that there is a painful period ahead of slow growth or weak recovery with continuing high levels of unemployment and severe restraint or cuts on public spending. The public will accept such privations if they understand the necessity for these measures and if there is a sense of fairness in the sharing of burdens. That is why we suggest a revenue neutral package of tax changes centring on tax cuts for the low (and average) paid, by lifting the income tax threshold to £10,000.

The Liberal Democrats believe that it is simply not possible to address the problem of an unsustainable budget deficit without parallel action to rebalance the tax system and eliminate the unfairness at its core.

There are painful times ahead but we believe that the measures I have set out to support economic recovery will do much to reduce the pain. We understand the enormity of the challenge ahead and are ready for it.

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