It is encouraging to be part of a Lib Dem chorus from across the party denouncing Osborne’s damaging, ideologically inspired, proposals for further deep cuts in spending on public services throughout the next Parliament.

Being in coalition means that we have to go out of our way to differentiate ourselves clearly from the Tories on the central issue of economic policy. The Tories want to create an election narrative of Tory competence versus Labour incompetence (with the LibDems portrayed either as marginal to the story or cheering the Tories on). Next week’s parliamentary debate on a fiscal charter makes the issue of differentiation particularly topical.

There is a dilemma we face as a party in striking a balance between genuine pride in the current recovery, while also being frank with the public about where more needs to be done: preventing a potentially destabilising housing inflation and rebalancing the economy to emphasise exports. These must all be addressed if we are to see a genuinely sustainable long term recovery. We must also stress the successfully interventionist aspects of economic policy which would not have happened without the Lib Dems, although the Tories constantly try to claim joint parentage (the Regional Growth Fund; the British Business Bank and the Green Investment Bank; the revival of apprenticeships; bank reform and restructuring; industrial strategy and the success of advanced manufacturing; support for science and industrial innovation). We have a distinct economic narrative that must be heard above the din.

The real battleground is in the future, where Osborne and the Conservatives are departing most obviously from the positions taken in Government. Osborne has set out an agenda of continued cuts in public spending leading both to substantial tax cuts and huge budget surpluses in the next parliament. Anyone wanting to understand this vision of the future should read December’s Economic and Fiscal Outlook by the Office of Budget Responsibility, particularly Box 46. Its central forecast, based on Osborne’s assumptions, has drastic implications for government spending, especially on ‘unprotected’ areas (i.e. other than health and foreign aid). For the armed forces, the police service, funding for local government services, justice, student support, universities, further education and research spending is more than halved in real terms from the levels we inherited in 2010 with the bulk of the cuts in the next parliament. Day to day spending on government services reverts to levels last seen in the 1930s. We have been warned.

The immediate challenge to differentiate ourselves from the Tories is in relation to the next three years to 2017/18. Having roughly halved the structural budget deficit in four years, the party has committed itself to completing the job in the next three years, (i.e. by 2017/18) and to do so fairly. This commitment is to be enshrined in a fiscal compact being put before parliament in the next few days. The compact is sensibly and pragmatically couched in terms of a flexible “rolling programme” and so should attract cross-party support. But the debate is an opportunity for us to rehearse our deep differences from the Tories.

First, deficit reduction on this scale and at this speed cannot be accomplished without increasing the contribution of tax (some 20%in the current parliament). Otherwise public services will be cut in very damaging ways . Our party’s current proposals on tax are already better developed than the other parties (high value property; high earners’ tax reliefs). But, given the public’s understandable wish to improve living standards, there is little appetite for tax increase on consumption or incomes. We will therefore have to raise large sums from banks and other financial services (which have got off remarkably lightly). Another area for potential tax receipts is by curbing some of the tax reliefs and avoidance opportunities available to the corporate sector. Some are sensible incentives to promote investment and research and development; but others are questionable value for money.

Second, we have already parted company from the Tories on the need for a substantial boost by borrowing for public investment. At present a major opportunity is being missed for financing productive capital investment in our infrastructure, social housing, science, and innovation with the very cheap capital available to the government (long term interest rates are close to zero in real terms). Such investment also provides a big stimulus to UK employment and supply chains. Tories will object that ‘you can’t borrow your way out of debt’. But it depends what the borrowing is for: running an overdraft is quite different from borrowing to make productive investment – which can reduces the ratio of debt to GDP.

We can see the scope for clear political differentiation on economic policy. Labour is evasive in explaining what they could do in government after a chequered and damaging record in office. The Tories offer extreme, ideologically driven, policies which would seriously damage public services. That is a real opportunity here for our party to be radical and different.


This article was originally posted on Liberal Democrat Voice.