The Liberal Democrats' economic plans include spending cuts and banking reforms
Gladstone, Asquith, Lloyd George – Vince Cable? A week ago the prospects of the MP for Twickenham following in the footsteps of the chancellors whose portraits adorn the walls at London's National Liberal Club were remote. The party's manifesto was reported but scrutinised less carefully than those of Labour and the Conservatives.
That, though, was before last Thursday's debate between Gordon Brown, David Cameron and Nick Clegg, after which the bookies shortened the odds on Cable delivering the next budget. George Osborne is still favourite to be the next politician to stand outside 11 Downing Street with the battered old red box, but the surge in support for the Liberal Democrats means that the former Shell economist is now number two in the betting, ahead of either of the Labour front-runners, Alistair Darling or Ed Balls.
Like Osborne, Cable has announced plans for an emergency budget to be delivered by the end of June. Until now, however, few have bothered to explore the details of what would be – if undiluted by the horse-trading that would accompany the formation of a coalition government – a mix of redistribution, draconian spending cuts and the dismemberment of Britain's banks. While potentially not quite as explosive as Lloyd George's 1909 People's Budget, Cable's package would be headline-grabbing stuff.
The measures are certainly a far cry from the 2004 Orange Book, a collection of pro-market and anti-regulation essays penned by leading Lib Dems, including Cable. The financial crisis of the past three years has shifted Liberal Democrat economic policy broadly to the left.
While still emphasising the need to cut red tape, Cable and Clegg favour hefty redistribution, direction over bank lending, the severing of investment banks from high street banks, a financial transaction tax and a public interest test to protect UK companies from takeovers.
Cable would combine an interim spending review with his budget. He agrees with Darling that the economy is too weak to bear a tightening of fiscal policy in 2010, but he would be planning a levy on banks and specific departmental spending cuts beginning in spring next year that would save £16bn by 2014-15.
Cable said today that the main elements of the Lib Dem economic package could be delivered within weeks of an election. An immediate step, he said, would be to give Lloyds and RBS, the banks in which the government has a big equity stake, new and tougher lending targets.
"That is crucial because we won't get economic recovery without them. The banks will be told to get on with it," he said.
He added that there were two ways of breaking up the banks – a soft route using capital adequacy rules or a more brutal approach in which the government simply issued instructions. "I would want to do this in a measured way taking advice from Mervyn King," he said.
On the tax side, the Lib Dems would again defer almost all action until 2011 but would then raise the personal allowance for income tax to £10,000, a move that would lift many of those on low incomes out of tax altogether but would cost £17bn.
This would be recouped by raising capital gains tax (raising £1.9bn), restricting pension relief to the basic rate of income tax (£5.4bn), a 1% mansion tax on properties over £2m (£1.7bn), higher taxes on aviation (£3.3bn) and a crackdown on tax avoidance (£4.6bn).
But this, according to the party, is just the start. Once in government, they would conduct a full spending review in consultation with the public. "This will identify the remaining savings which will be needed to balance the government's books". While both Labour and the Conservatives have ring-fenced spending on the NHS and international development, Cable says all departments should have their budgets carefully looked at, but that the emphasis will be on savings that can be made across Whitehall by curbs on public sector pay, public sector pensions and IT procurement. There is a promise of a £2.5bn pupil premium to be spent on the one million most disadvantaged children in schools.
The Institute for Fiscal Studies, the thinktank that specialises in tax and spending issues, questioned the likely savings from rooting out tax avoidance, calling them "highly speculative", but said it was possible some of the tax changes – particularly the reform of capital gains – might raise "substantially more" than Cable's estimates.
Changes to tax and spending in the current financial year, which ends next April, would be limited and neutral. The Liberals would scrap the Child Trust Fund and make tax credits less widely available in order to release funds for spending on jobs and infrastructure projects.
Gordon Brown said this week that he opposed Lib Dem policy on tax credits and the Child Trust Fund; Labour advisers have raised eyebrows at Cable's plans for cuts in public spending, which are tougher than Osborne's.
The Conservatives dismissed Cable's budget plans, saying that the fiscal arithmetic failed to add up. And they accused him of doing a U-turn for first accusing Osborne of "schoolboy economics" for planning to cut national insurance contributions, then expressing the desire to do the same in the next parliament if the money was available.
On the other two parties, Cable said: "They don't know whether to attack us or hug us to death."
Up until now, Labour and Conservatives have tended to treat the Liberal Democrats with haughty disdain. That may be about to change.
Famous first budgets
Lloyd George in 1909
In his so-called People's Budget, Lloyd George paid for old age pensions through higher income tax, concentrated on those on higher incomes, a supertax for those on more than £5,000 a year, higher death duties and land tax. The measures were opposed by landowners in the House of Lords, causing a constitutional crisis and eventual reform of the upper house in 1911.
Churchill in 1925
A novice at economics, Churchill was persuaded by officials at the Treasury and the Bank of England to put sterling back on the gold standard at its pre-first world war parity of £4.86. This resulted in a stronger pound, dearer exports and severe deflationary pressures on an already struggling UK economy. The decision led indirectly to the General Strike a year later and the 1931 financial crisis, when the pound finally came off the gold standard for good.
Sir Geoffrey Howe in 1979
A month after Margaret Thatcher's election victory, Howe doubled VAT from 8% to 15% despite the Conservatives having claimed in the election campaign that Labour claims of such a move were "unfounded". The increase paid for a cut in the basic rate of income tax from 33p to 30p and a reduction in the top rate of tax from 83p to 60p, but led to a surge in inflation.
Gordon Brown in 1997
The first Labour budget in 18 years saw a windfall tax on the privatised utility companies, which raised £5bn for a welfare-to-work programme. In retrospect, the most contentious measure was a scrapping of dividend tax credits worth £5bn for pension funds and other companies coupled with higher tax allowances and cuts in corporations tax designed to persuade companies to invest more.
Copyright Speakers Corner 2016