Essentially Labour are saying they would cut by less and later. The purpose of this article is to discuss the “too fast” part of this argument.

The first six months of the coalition’s time in office saw higher than expected growth and higher than expected inflation. Neither of these were really caused by anything the coalition did in those six months, rather they were the twin legacies of the stimulus which Gordon Brown (quite rightly) implemented in his last months as Prime Minister, and the cyclical upswing which came to many world economies in mid-2010.

But it is those very actions of the last Labour government which show that this Labour Party, led by a former senior adviser to Brown, in Ed Milliband, are wrong to maintain the stance that the coalition began the cuts ‘too soon’.

The problem with this argument is that it ignores a first principal of economics, that people respond to what they expect to happen rather than just to what is happening.

If you tell the public that massive cuts are coming, not this year but next year, then a significant cohort of the public will consciously and unconsciously rein in their discretionary spending and put off new borrowing due to the uncertainty they are feeling about what will be cut next year and a desire to preserve any surplus this year in preparation for a possible reduction in come next year.

The effect of this on the national economy is that demand from private citizens and companies falls this year, which results in job losses, lower tax receipts reduced economic activity and lower growth, causing a further and deeper fiscal crisis than the government started with.

At the same time, there would be great uncertainty in the financial markets, unsure of what the governments plan would be. (I know it’s fashionable to adopt the attitude that we shouldn’t care what the financial markets think, they got us into this mess etc. But the government needs them on board as it borrows money from them, and would need to borrow more, if it cuts by less and later as Labour advocate.)

This uncertainty in the financial markets would see the cost of Britain’s borrowings rise, leaving less money for the government to spend on frontline services. At the same time the value of sterling would be likely to decrease, causing the cost of imports to rise and consequently, a further squeeze on the cost of living, reducing demand and eroding confidence further.

All of this would mean that waiting until next year to cut would have the same effect as cuts this year, (increased unemployment at least in the short term), peoples real incomes being squeezed and pressure on public services, but with the deficit still growing and confidence in Britain still low, in short all of the negative consequences of the cuts but with none of the positive impacts on the macro economy over the medium term which cuts are designed to produce).

Then, ‘next year’ would come, and Labour would start cutting, adding a reduction in public sector demand to the reduction in private sector demand a already happening, and with demand being squeezed from all sides, and no signs of an upswing there would be a very strong chance of the economy slipping into a further recession.

They started by highlighting the dangers of a double dip recession because the government would cut too fast and too deep. Now, that’s something which Ed Milliband doesn’t even believe if you give credence to his recent appearance on the Andrew Marr Programme.

When the media were airing the cuts too fast argument, I indicated that the danger facing the economy over the medium term would come from inflation.

When the media turned its fire on the danger of inflation, and called for interest rate rises, the dangers of which I had highlighted.

The next bandwagon to form came after the recent poor economic data

This provoked the media into another spasm of criticism and calls for something called a growth strategy. But in truth such economic stimulus on the demand side is not needed: the most recent inflation figures showed that inflation was far above the Bank Of England’s own target. Much of this demand is caused by supply side factors, such as the decline in the value of sterling and the rise in the price of oil, caused in part by the poor weather. But, according to Ian King, Business Editor of The Times, it is possible to break down this headline inflation figure even further, and that the measure which comes closest to measuring aggregate demand, core inflation, is at a thirteen year high. This figure is the part of the inflation figure which strips out the rise in the costs of getting goods to markets, such as the VAT rise and the rise in the price of oil. While this number is at a thirteen year high in Britain, its at almost zero in the United States, and other peer economies, which is why the US is having another round of stimulus and the UK is cutting.

This high level of demand in the economy shows that a demand side growth strategy, which is what the media are advocating, is not needed.

That demand is high in the economy is further endorsed by the latest retail sales figures, which also show an increase in demand.

A major problem at the moment is that whatever growth there has been in the economy is not achieving maximum value because of rising prices, but as the deficit falls, and the currency strenghtens, growth will be enhanced, as the pound a person spends buys more goods in the economy, allowing it to create more production, demand and eventually jobs. So in truth, the current government policy is the best growth strategy for the future, and the ‘growth strategy’ bandwagon is one Lib Dems of all persuasions need to avoid jumping on.

The UK economy continued to recover from recession in the first three months of the year, according to official estimates. GDP grew by 0.2% between January and March, the Office for National Statistics (ONS) said.

Here’s what Lib Dem shadow chancellor Vince Cable had to say – in text:

These figures show that the promised recovery is barely visible. There is a real danger of the UK going into a double dip recession. As people deal with their own debts and as the banks continue to strangle good British businesses by starving them of credit the recovery will remain fragile.

“The British economy has had a massive heart attack – it has just emerged from the intensive care unit into the recovery ward. The worst possible action is the Tory proposal to pull out the drip-feed when the patient is still in a critical condition.

“Not only must we tackle the deficit in a considered and rational fashion, we must also ensure that we support jobs and infrastructure as well as making sure businesses get the credit they need to drive growth in the economy.”

And on video:

Here are the results:

Putting your party allegiance aside, who do you trust most to steer Britain’s economy through the current downturn?
Gordon Brown & Alistair Darling 33% (+7% on Dec 2009)
David Cameron & George Osborne 27% (-6%)
Nick Clegg & Vince Cable 13% (-6%)
Don’t know 27% (+5%)

While it’s the Labour-Tory reversal of fortunes which is grabbing the attention, there is a noticeable drop in the proprtion of voters naming the Lib Dems’ team of Clegg and Cable as the pair most trusted on the economy. My guess is this has much more to do with a bounce in Labour’s perceived competence than it does in a sudden dip in confidence in the Lib Dems. This is, after all, in line with Labour’s climb above 30% in most of the opinion polls.

Vince Cable remains the choice of most voters as their dream Chancellor, according to two polls this week: one for PoliticsHome, the other for the Mirror. This is a quite remarkable accolade for a Lib Dem MP … but it doesn’t seem to translate into confidence in the Lib Dem leadership.

Some might argue that the logical conclusion is Nick Clegg is a drag on the leadership ticket. I don’t believe that’s the case, and the fact that polls consistently rate him the most popular of the three party leaders backs up that view.

But today’s poll does highlight, as Helen Duffett noted on LDV earlier this week, the challenge for Lib Dem campaigners in translating the popularity of St Vince into bankable votes.

Only myopic Labour/Tory tribalists will try and pretend a government with the support of one-in-five of the electorate can decimate (in that word’s literal sense) public spending to bring the deficit under control with any kind of legitimacy.

No, the problem I have with Nick Clegg’s idea is this: the name, ‘Council of Financial Stability’. No doubt it will do what it says on the tin, but there’s something inescapably bureaucratic, corporatist and 1960s about it. Before long, we’ll be promising to bring back the Department for Economic Affairs and ‘Neddy’. And, no, I don’t have a better suggestion. (Not a serious one, anyway: Cuts-u-Like?)

But enough of my cavils. Here’s the significant bit: what Nick said in his speech at the London Stock Exchange, co-hosted by the WWF and CentreForum:

Government-as-usual will not, cannot, command the legitimacy to make the big decisions before us. The scale of the changes required is so great it will require a different way of taking decisions too.

“The standard model, of Governments elected with a minority of popular support, cooking up fiscal plans behind closed doors in Whitehall, imposing cuts from on high is a recipe for Greek-style social and industrial strife.

“So we need to find new ways to arrive at decisions so that politicians put the long term national interest above their own short term interests and actively involve the public in the decisions taken.

“The Liberal Democrats would establish a cross party Council for Financial Stability.

“We would invite the economic spokespeople of all the major parties, the Governor of the Bank of England, and the Head of the Financial Services Authority to join the Council.

“The purpose would be to force the politicians to put the long term national interest ahead of their own narrow political interest, and agree the basic timetable and scale of deficit reduction in the years ahead.

“Agreeing that timetable according to sound economic tests, like those Vince Cable has already set out as a means of judging when to begin the process of fiscal contraction:

“The rate of growth; the level of unemployment; credit conditions; the extent of spare capacity in the economy; and the cost of Government borrowing.

“This would not prevent political parties from arguing about what changes should be made to taxes and in public spending, or which areas of taxation and spending should be immune from any change, but it would force the whole political class to come clean and tell the people of Britain what the scale of the changes actually will be.

“With a structural deficit now estimated at £80bn, and market confidence shaken by the unwillingness of the politicians to spell out what they’re committed to achieving, it is essential that politicians of all parties demonstrate that they will no longer play games with the stability of Britain’s long term financial reputation.

“Including the monetary and banking authorities will also allow for a more coherent debate about the interaction between monetary and fiscal policy. As well as the role of the financial services sector in underpinning, not undermining, growth.

“Crucially, given that the full elimination of the structural deficit will almost certainly take more than one parliament, an agreed approach on the overall scale and timetable of fiscal consolidation will provide both the British public and the markets with the assurance that a consistent and responsible approach will not be hijacked by politics in the future.”

Banking
We need to rethink our approach to banking. Successive Labour and Conservative Governments have left Britain vulnerable to an over-inflated financial services sector, where institutions became too big to fail.

On a UK level – where British banks are 4.5 times bigger in terms of their liabilities than the country’s economy – this is bad enough. But in Scotland, this has been still more pronounced. At the time they got into trouble, RBS’ and HBOS’ liabilities were 25 times the size of Scotland’s economy.

We have to break up the banks, in particular the vast Lloyds group, and bring the Bank of Scotland home. This would not only help protect us from the threat of banks that are too big to fail – it would also increase diversity in Scotland’s financial sector and competition on the high street.

Until the banks are split up, the Liberal Democrats believe that they should pay for the guarantees they receive which is why we would introduce a 10% levy on banks’ supplementary profits.

Business lending
The publicly-owned banks have an important role to play in ensuring credit is available to the sound and solvent small and medium sized businesses who are the drivers of our economic recovery.

Worryingly, the FSB estimates that around 1/5 of small businesses in Scotland are reliant on credit cards to finance their business. This suggests RBS and Lloyds are not living up to their obligations – obligations which Gordon Brown and Alistair Darling are meant to enforce.

The Government needs to get a grip on these banks, which after all are publicly owned, and ensure they provide credit to sound small and medium sized businesses so that they can survive and expand. This will protect jobs and ensure that growth isn’t damaged. This is where RBS’ money should be being spent, rather than being thrown away on extortionate bonuses.

Building a sustained recovery
What has to emerge from the current crisis is a sustained recovery not an ephemeral or unstable one; not another bubble; not a boom which depends on the fickle fortunes of the banking sector.

And that is why the Liberal Democrats want to underpin stable, sustainable growth by maintaining the operational independence of the Bank of England, investing in education and by supporting private institutional investment in Britain’s infrastructure through the creation of an Infrastructure Bank.

Public Spending
We do not approach any difficult spending decisions with relish. We realise that we are dealing with staff who have a real sense of public service and with services which are valued.

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 reduce government spending.

There are fundamental changes that need to be made to how the British state operates – axing much of the command and control system overseeing local government and NHS administration, scrapping expensive Home Office projects like ID cards and some substantial reductions in defence procurement such as Trident.

I have to tell you that I have had the pleasure of receiving not one but two letters from Alex Salmond regarding the Scottish Government’s spending plans for 2010-11.

As is the case in all elections, we will be laying out plans for tax and spending for each year of the next Parliament in our manifesto and have assured Mr Salmond that Liberal Democrat plans would not reduce the Scottish budget but in fact increase it.

Mr Salmond acknowledged in his correspondence that from 2011-12, the public sector will face several years of fiscal austerity in Scotland, as well as the rest of the UK.

The Liberal Democrats have led the way on coming up with a credible and rational plan to deal with the deficit – its time that other parties displayed the same openness and honesty with the British people. To that end, I have asked Mr Salmond if he will follow our lead and set out how the Scottish government intends to meet higher budget controls in the coming years.

QE was the right thing to do: it may become the most significant step that Labour took to fight recession. … [it] quite possibly averted an outcome far worse: an economy-wide insolvency so persistent that Britain may have looked upon Japan’s lost decade with envy.

But uncertainty about how much it may work does not excuse silence about its political ramifications. If QE makes inequality worse, it will be the taxpayer who has to fix the problem. In a new research paper, CentreForum calls for greater recognition of the side-effects of QE.

As we go into a period of fiscal austerity, political decisions about “sharing the burden” need a mature understanding of who has benefited from taxpayer-funded interventions. Some on the right mistakenly believe that it has only been welfare recipients and mythical hordes of public sector bureaucrats. This is not so. In the case of QE, it is the wealthy that have the greatest reason to thank Alistair Darling. Whoever designs the next budget should take this into account.

You can read Giles’s article in full here. And look out for his forthcoming Lib Dem Voice article, coming soon!

So far, so yawn. Or as Vince Cable put it today:

Labour and the Tories are accusing each other of being confused and contradictory on the economy, and they’re both right. The fact that they insist on this political bun fight shows they have failed to understand that the British public and the markets want a clear picture of what the next Government will do.

“The Liberal Democrats are the only party that has had a consistent approach.

“We’ve been very open about the scale of cuts required and setting out where our priorities would be, while recognising that the timing must be decided by the strength of the economy. That is why we have set out five tests for when and how we start to cut.”

And here’s a reminder of those five tests to form an objective judgement of when it’s safe for the British government – whether gold, red or blue – to start cutting public spending:

• evidence of sustained economic growth;
• employment growth;
• overseas demand (especially in the EU);
• monetary and credit conditions in the UK; and
• the market cost of government borrowing.

And in case you’ve not had your fill of Vince’s common-sense, here’s a 30-second video pointing out the Tories’ economic muddle:

(Hat-tip: PoliticsHome).

Here’s what Lib Dem shadow chancellor Vince Cable had to say:

The markets will be surprised that growth has been markedly slower than expected. Far from the quick recovery the Chancellor has been praying for, the economy is only just staggering back into growth.
 
“The British economy has had the economic equivalent of a heart attack and is still very weak. With both the construction and banking sectors in trouble, we are not out of the woods yet.
 
“The economy remains dependent on artificial money creation and a Government running a massive deficit, but with growth of just 0.1%, Tory proposals to immediately slash government spending would be disastrous.
 
“Our economy is too reliant on consumer spending and debt and a failing financial services industry. A lasting and sustainable recovery can only be achieved if we correct these fundamental imbalances.”

2 Must-Read Blog Posts

What are other Liberal Democrat bloggers saying? Here’s are two posts that have caught the eye from the Liberal Democrat Blogs aggregator:

• “Change”: deliberate, disingenuous, dangerous deception (Jock Coats)
  

  There can be no “change” whilst the wheels of State rumble on. Changing how the State is run for a few years does not alter the fundamentally evil reasons for which “State” was invented and which it continues to pursue, inevitably.

• Broken Britain is sadly a reality for many (Lisa Harding)
  

  Whilst I don’t always agree with most of the comments of my Conservative friends, I am drawn to admit that their comments that society in Britain is broken in some ways is actually more accurate than some of us would like to admit.

Spotted any other great posts in the last day from blogs that aren’t on the aggregator? Do post up a comment sharing them with us all.

2 Big Stories

The end of the recession is officially here

No matter that the economy is groaning under the weight of debt, with a public sector jobs squeeze still to come, the worst recession in 90 years ends tomorrow. Here’s how The Independent reports it:

The worst recession since the 1930s should be officially declared over tomorrow. Economists are almost certain that the Office for National Statistics will reveal that the UK’s economy grew by about 0.3 per cent in the last three months of last year, leaving Britain the final major economy to have emerged from recession. Gross domestic product (GDP) is 6 per cent below its 2008 peaks.

An apparent rush to the shops to beat the increase in VAT on 1 January, the Government’s vehicle-scrappage scheme, and a revival of exports are thought to be boosting output. The widely anticipated announcement will mark the end of 18 months of continuous economic decline that has cost the economy £100bn in lost output, and has seen 1.3 million workers made redundant and 50,000 families lose their homes through repossession. Last year was the worst year for the British economy since 1921.

Carry on working, says Equality and Human Rights Commission

The BBC reports:

People should be allowed to work beyond the age of 65 and with more flexible hours, the Equality and Human Rights Commission has said. In the UK a worker can see their employment end at 65, even if they do not want to retire.

The commission wants ministers to scrap the retirement age, saying it is out of date and discriminates against people who want to carry on working. The government has promised a review of the law.

A long overdue end to outdated discrimination? Or yet another way of exacerbating inter-generational inequality, with younger people finding it harder to get their foot on the job ladder?

The Lib Dems – in the shape of Nick Clegg and Vince – have sharply questioned the role of the Government in the takeover. At Prime Minister’s Questions yesterday, Nick asked Gordon Brown:

… there is a simple principle at stake. Tens of thousands of British companies are crying out for that money to protect jobs, and instead RBS wants to lend it to a multinational with a record of cutting jobs. When British taxpayers bailed out the banks, they would never have believed that their money would be used to put British people out of work. Is that not just plain wrong?

Meanwhile Vince has written to the Business Secretary, Lord Mandelson, arguing that:

It seems perverse that a bank still in receipt of large taxpayer support and majority owned by the state should be part funding a takeover of a British company which will likely put jobs at risk and hurt the British economy. We have seen today both Kraft’s and Cadbury’s credit rating lowered to the lowest investment grade on account of the highly leveraged nature of this takeover; so RBS’s decision seems particularly strange. Did RBS at any point discuss its plans with the Treasury and if so did Ministers express a view on its proposed funding of this takeover for the benefit of the UKFI directors on RBS?

The questions are wholly valid. But they beg the question: what would the Liberal Democrats do if we were the government having to make these decisions? The strong implication of Nick’s and Vince’s questions are that the party would have used its position as an RBS shareholder to veto the deal.

In doing so, they would have the strong backing of, among others, TUC general secretary Brendan Barber, who blogged today in praise of Nick’s “very effective” questions to Mr Brown.

The party is of course right to point out Labour’s hypocrisy on the issue – attempting to gain kudos for opposing the deal with words, while at the same time not lifting a finger to stop it with their actions. Labour MPs have been indulging in that kind of cant for years now, supporting Government decisions which mean hospital closures while campaigning against those same closures if they fall within their own constituencies. (Examples: here, here, here, and here).

But we need, I think, to be much clearer about why we think a Liberal Democrat government would intervene to stop RBS lending money to Kraft.

Is it because we think Kraft is an unsuitable ‘foreign predator’, and British jobs might be lost? This is a defensible position: after all, the costs assocuated with those job losses will have to be covered by the taxpayer. In that sense, the government would be looking after its own interests as a shareholder. But the implications for a government intervening in the market on those grounds go well beyond the Kraft/Cadbury deal.

Or would a Lib Dem government intervene because it thinks the deal itself is too highly leveraged, and skewed in favour of hedge funds with short-term interests? Again, it’s a defensible position: after all, the banks have not proved themselves to be experts in picking debtors able to meet their obligations, and it’s the taxpayer who’s picked up the bill. Again, in that sense, the government would be looking after its own interests as a shareholder. But are we really saying that politicians should be the arbiters of whether a takeover deal makes sound financial sense?

These are difficult areas for liberals, as the Prime Minister’s reply to Nick Clegg at PMQs acidly noted:

If the right hon. Gentleman is really suggesting that the Government can step in and avoid any takeover that is taking place in this country overnight, and then tell a bank that it has got to deprive a particular company of money by Government dictate, his liberal principles seem to have gone to the wall.

We cannot in any case be sure that, even if the Government had blocked RBS from lending money to Kraft, the deal would not have gone ahead: non-state-owned banks would have been able to lend Kraft the money without any possibility of government intervention.

Nick and Vince are right to ask the awkward question of Gordon Brown and Peter Mandelson: why is a state-owned bank funding a deal Labour says it opposes? But, equally, we need to be clear what our answer would be in their shoes.

And if the party is saying it would stop RBS from loaning the money, we will need to give precise answers as to why we’d intervene, and ensure we apply these reasons rigorously and consistently across every significant lending decision being taken by the state-owned banks. Sounds like a task for big government.

On this day, in 1788, Britain established a penal settlement at Botany Bay in Australia; while, in 1903, President Theodore Roosevelt sent the first transatlantic radio transmission originating in the United States to King Edward VII. Even more excitingly, it’s the birthday of AA Milne (b. 1882), Oliver ‘Laurel &’ Hardy (b. 1892), Cary Grant (b. 1904) and Peter Beardsley (b. 1961).

But without further tarrying …

2 Must-Read Blog Posts

What are other Liberal Democrat bloggers saying? Here’s are two posts that have caught the eye from the Liberal Democrat Blogs aggregator:

• Holyrood: The Budget Battleground (Caron Lindsay)
  

  The first act of the budget drama plays out this week. Let’s hope that the process is more serious production and less pantomime farce.

• A couple of classy links (Alix Mortimer)
  

  I once saw a blogger, a smart, impassioned, left-wing blogger, comment to the effect that his £40,000-odd salary was not that high.

Spotted any other great posts in the last day from blogs that aren’t on the aggregator? Do post up a comment sharing them with us all.

2 Big Stories

It’s Campbell vs Campbell: Ming demands Alistair recall over dodgy Iraq inquiry evidence

As Scotland’s The Herald reports:

Alastair Campbell should be recalled to the Iraq inquiry after a “clarification” about his evidence “comprehensively failed” to clear up anything, according to Sir Menzies Campbell, the former Liberal Democrat leader. The Fife MP insisted that a letter sent to the inquiry by Tony Blair’s former spin doctor attempting to clarify something he had said during his five hours of evidence last Tuesday had “not been effective”. …

Sir Menzies said: “In fairness to Mr Campbell and in the interest of the inquiry itself, he should be recalled to give further evidence on these matters and to allow members of the inquiry to question him again. These issues go right to the heart of the deliberations and the responsibilities of the committee; this is why clarification is key.”

Meanwhile, in a manner more befitting a centre court match at Wimbledon, there will be a public ballot later today for people wanting seats to watch Tony Blair appear before Sir John Chilcot’s Iraq Inquiry. The BBC notes, ‘The ballot is for 60 seats, with a third of the places being set aside for bereaved families of service personnel or other Britons killed in Iraq.’

British Economy Faces A ‘Decade Of Pain’

At least according to leading economic forecaster the Ernst & Young ITEM Club – Sky News reports:

… the forecaster warned there would be little growth in what would be a “challenging year” ahead. Official figures due later this month should confirm an end to recession in the final three months of 2009.

But the emergence does not mean Britain is revelling in stronger economic activity. Several initiatives, such as the car scrappage scheme, have propped up spending.

Chief economic adviser Peter Spencer predicted growth of around 1% this year.

And to think in a few months time George Osborne might be the Chancellor in charge of the British economy. Oh God, no: please spare us from George, and deliver us unto Vince.

Once the seasonal festivities are out of the way, the public will be on the receiving end of months of sustained political bombardment over the airwaves and through the letterbox until a General Election puts an end to it. As someone who will be firing a lot of the ammunition, I am ready for this battle but I am conscious that the old rules no longer apply. Voters want change but feel the whole political system has become discredited. …

The people feel that corruption has crept into a political system that was once the envy of the world. And the way we pay for politics makes it worse. The taxpayer is understandably reluctant to foot the bill for party politics, so parties depend on rich donors. It is truly shocking that this coming Election could well be decided by a handful of super-rich donors – who are non-domiciled in the UK for tax purposes – buying seats in Parliament. Our political standards are too close for comfort to the ‘rotten boroughs’ of 200 years ago or to rotten regimes in Africa and Latin America today. Another frustration is that the two-party ‘Punch and Judy’ model which most of us grew up with no longer corresponds to reality. …

Britain needs the authority of a strong, broadly based government to tackle our grave economic problems, not a weak government sneaking into office with a lot of MPs but no real mandate and the support of one in four voters. The country could, slowly, become ungovernable. That is why fundamental political reform is not a luxury beloved of political anoraks but a necessity for the country.

You can read Vince’s article in full here.

Chris’s credential for writing an article outside his brief? Well, he founded the sovereign group at Fitch Ratings, and was group managing director. Here’s an excerpt:

Last week Moody’s — one of the big three international ratings agencies — warned that the UK’s top bond rating would be under threat if Britain failed to sort out its public finances in the next three years. For the first time in decades, British Chancellors have to worry about the bond market. … the bond market is vast, global and powerful, as it sets the tone for all the other markets, including shares. Within the bond market, there is no more crucial part than the market for government bonds because they are traditionally regarded as the safest. Hence their UK name: gilt-edged securities, or gilts. If sovereign debt becomes riskier, it affects everyone else’s debt, too. Even share prices often fall. …

The ratings agencies do not claim to pinpoint when a borrower will default, but to assess the likely chance that they may. The notations — from the top AAA down to C — reflect the probability of default. There is a long history of corporate and bank borrowing against which defaults can be assessed. The difficulty arises in those areas — including government bonds — where there are not so many issuers and the history is patchy. Analysts then have to use their judgment, and we know that they can get things horribly wrong, as they did during the credit crunch. …

In each upturn, there is usually some new instrument — in this crisis, securitised lending, but in the Eighties crisis it was multi-bank syndicated lending — which people think is far less risky than anything that went before. We do not discover the error until the next crisis. During the boom, the risk of the innovation is systematically under-priced, helping bankers and brokers to make the most dangerous case in markets: “This time it is different.”

Rating agencies ought to be immune, but sadly most people who work for them are human. This might account for why they are so vigorously rattling their chains today: hell hath no fury like an agency analyst caught out being a softie.

The agencies also have financial interests. … [Fees from the banks, companies and governments they rate] do undermine judgment, because the boss’s pay packet depends on growth and success. Throughout the last upturn, structured finance was the go-go sector of the bond market, coining billions for bankers and agencies. No one wanted to kill the golden goose.

What is the solution? … The best option would be to insist that the agencies publish every year exactly how much they receive — or do not receive — from each bond issuer. Academics could then check whether there was a relationship between fees, ratings and rating changes. Agencies that wanted to keep their reputations would happily bite the hand that feeds them.

The key is surely transparency in these mysterious but important institutions. Greater openness is the path to honesty in the use of power.

You can read Chris’s article in full here.

(Hat-tip: the Lib Dems’ ACT website).

Vince also appeared in yesterday’s Times, which the Voice failed to cover yesterday, arguing that Alistair Darling would have done better to model his PBR on one of his predecessors, Roy Jenkins. Here’s an excerpt:

Few chancellors are loved. They can, however, earn respect. … [Alistair Darling] could be the Roy Jenkins of his generation. … the approach that Jenkins brought to bear — through spending cuts and tax increases — was precisely what is required today: candour and clarity about the state of the nation’s economy; willingness to confront sacred cows (in his case, overextended defence commitments and prescription charges); and a commitment to sharing the burdens fairly (then, a fierce tax on investment income, which was seriously unpopular in the City). His policies worked; his legacy was a strong budget and balance of payments.

Candour now has to start by acknowledging two painful realities. One is that the economy is still very weak. It will not just spring back to strong growth. Recovery may well be painful and slow. The withdrawal of monetary steroids, the overhang of personal indebtedness, the continuing restrictions on credit availability and cost, worries over high and rising unemployment, a fall in business and public investment: all will inhibit growth.

The other reality and impediment to recovery is the state of the public finances. It may be possible for the Government to continue to borrow 12-13 per cent of GDP — £175 billion — for a short while at current low borrowing costs. But the structural, long-term element in the budget deficit is so large — a product of overdependence on the financial sector for government revenue — that Britain is now the most likely of the G7 countries to experience a serious loss of creditworthiness. …

Policy should be decided not on the basis of party advantage but economic fundamentals. That is why I am suggesting five tests on which an objective judgment should be based: evidence of sustained economic growth; employment growth; overseas demand (especially in the EU); monetary and credit conditions in the UK; and the market cost of government borrowing. …

A generation ago Jenkins earned the nation’s trust as he turned the economic crisis around. He told the truth. He made the rich pay their share. And he did the job in the national, not party, interest. Mr Darling and his successor, whoever it is, will have to lead the country through five years of hard economic slog. They won’t go far wrong if they follow in Jenkins’s footsteps.

You can read Vince’s article in full here.

This year, of course, there is considerably less room for LARGESS. So let’s start with a look at where we’re at.

A recession is defined as four successive quarters of negative growth. A BAD recession is FIVE successive quarters. No one has a term for SIX quarters of negative growth one after the other, because it has never happened.

In October, the UK announced that it had had six successive quarters of negative growth.

GULP!

Even when the revised figures showed that the economy shrank by 0.3% instead of the first announced 0.4% this was still history-makingly BAD.

Other records broken in October included the Government’s borrowing reaching a highest ever figure of 59.2% of GDP, while the Unemployment figures reached their highest since the Conservatories’ LAST recession back in 1995. Small comfort then but that the rise was very, very small. But the bad news is that young people were the worst hit, and that we risk another “lost generation” like that of the Tories’ FIRST recession in the early Eighties.

My fluffy chum from the Apprentice telly-show, Mr Sir Alan – now ennobled as Lord Sugar Plum Fairy – got into a bit of a GROUCH about all this recession business, and even Mr Frown’s Glove Puppet/Chancellor Sooty admitted that things were worse than expected.

And yet Mr Frown is looking more chipper at the end of all this disastrous news than he was at the start. How come?

It’s all perfectly simple: Mr Balloon’s Conservatories have seen their average polling numbers fall to below 40%. The wheels haven’t QUITE come off yet, but there’s a definite WOBBLE to the Conservatory bandwagon. And Hard Labour thinks that now they will be able to pull out of their crash dive and win a fourth General Election. As long as by “win” they mean “deprive the Conservatories of an overall majority”.

And how did this come about? One word: Europe. And another one: Betrayal!

Mr Balloon is actually a very WEAK leader. Unlike Lord Blairimort who was able to run rings around the dinosaurs of Hard Labour, and could – and this is ACTUALLY true – pull down their trousers and paint funny faces on their fluffy bottoms – too much information! – Unlike Lord Blairimort, Mr Balloon needs to keep offering up promises to his resident nutters or risk the Conservatory Party going all Noel’s House Party on him again. And HE’s the one in the GUNK TANK.

So he promised them he would leave the “sensible” right-wing grouping in the European Parliament and join up with the wingnuts, climate change deniers and former Latvian SS. So he promised to cut tax for dead millionaires and to “defend” marriage with a tenner a month. And so he promised, a CAST IRON GUARANTEE in fact, that he would hold a referendum on the Lisbon Treaty.

Bad luck for Mr Balloon then that the Irish only went and agreed to the Treaty (at second time of asking) and the Czechs agreed to sign (after much arm-twisting) leaving him up policy creek without a soundbite.

In fairness, they HAD always promised that they would tell us what their “Plan B” would be once they got to the position of having to say what they would do if the Treaty was actually ratified. Unfortunately, Plan B turned out to be: PANIC!

Basically, Mr Balloon was reduced to claiming that the Treaty was no longer a Treaty because it had been signed. Which was interesting. And that his promise no longer counted as a promise because um… er… um…

After three years of REPEATEDLY banging on about how the other parties promised a referendum and then didn’t give one, really just how THICK did Mr Balloon have to be to think that he could get away with promising a referendum and then not giving one?

He was, as the Star Trek fans say, HOIST with his own PICARD.

And as if that wasn’t enough, this was the moment that a tiny minority of the Norwich Conservatory Party decided to stage a WITCH HUNT with their own Parliamentary Candidate in the title role. When put to the test, Ms Elizabeth Truss had the – er – support she needed but all the publicity had made the Conservatories look, well, rather deeply conservative. Not to mention a bit SAD.

So with the Conservatories FLOUNDERING AROUND trying very hard to ignore the sound of harrumphing from deeply annoyed Europhobes and the hysterical braying of neo-Victorian backwoodsmen, Mr Frown took the opportunity to have Her Britannic Majesty read out a Mrs the Queen’s Speech so nakedly political that needed the words “advertising feature” appended over the top.

For the Liberal Democrats Captain Clegg condemned the whole business as “fantasy politics“, pointing out that there just wasn’t time to get though half the things the Government want to legislate for, and that that time would have been FAR better spent having Parliament try to clean up British politics and put right the MESS that MPs have made over expenses.

And, unlike bandwagon-jumping Mr Balloon, the Liberal Democrats have said this repeatedly and consistently. Remember Captain Clegg’s call to cancel MPs summer holidays. Liberal Democrats want this SORTED OUT, not just to tweak the Prime Monster’s nose about it and then drop it like an abandoned duck house.

CURIOUSLY, though, reform of Parliament was NOT on the agenda. Mr Frown later claimed that he thought it had all been taken care of already. Which shows HIS commitment to cleaning up his own mess.

It would be CHILDISHLY EASY to list out the bills that WERE in the Speech and take the Mickey out of them. So let’s do that.

The Flood Defenses Bill – too late…

The Energy Bill – will be HUGE…

The Care for the Elderly Bill – nicked from the Liberal Democrats…

The Child Poverty Bill – Government legislates to keep (or rather, force the Conservatories to keep) their 1997 promise 12 years late…

The Equality Bill – does not apply to Gay Daddies; all minorities are equal – some minorities are less equal than others…

The Policing, Crime and Private Security Bill – I’m sure that’s not SUPPOSED to sound like the Home Office is privatizing the police force, but…

The Children, Schools and Families Bill – Mr Balls guarantees every child an Ejucashun, Ejucashun, Ejucashun. His exact words: “That’ll teach ‘em!”…

The Digital Economy Bill – giving the economy the digit… no, done that already…

and

The Bribery Bill – oh, go on: make your own jokes up!

Anyway, this IS relevant to the economy because the two big PASTE JEWELS in this underwhelming CROWN were, of course, the Fiscal Responsibility Bill – allegedly a promise to halve the deficit in four years; in reality a STUPIDLY OBVIOUS booby-trap for the Conservatories (do they vote for it and then have to meet the promise if they get elected or vote against it and get accused of not being serious about tackling the Government’s debt crisis? Ooh, what a poser – they vote against it and say that it’s because it’s the Government’s measures that aren’t serious. Obviously.) – and the Financial Services Bill – supposedly giving them the power to tackle excessive bankers’ bonuses, but all the evidence so far is that they haven’t the HORLICKS to take on the banks.

The bankers themselves, or at least Mr Sachs of Goldman, now claim that they are “doing Mr God’s work“. That would be the SMITING then, would it? Presumably BANKING is in fact the ELEVENTH plague after snakes, locusts, flies, rivers turned to blood and Jedward…

Anyway, it wasn’t like the banks needed MORE good news, after Great Britain’s shiny new Supreme Court decided that it was just fine for them to charge exorbitant fees to anyone who goes overdrawn whether it’s by a thousand pounds for a month or a penny for an afternoon. Clearly that’s short for DALEK Supreme Court, there.

Oh, comes the cry from the banks, but SOMEONE’S got to pay the running costs if everyone else is to get FREE banking. Why should the people who stay in the black have to foot the bill for the naughty ones who go overdrawn?

Well, why should ANYONE foot the bill? Call me an old fashioned fluffy elephant, but isn’t that just the cost of “running a bank”? Couldn’t the BANKS pay their own costs, what with the VAST profits that they seem to make in every year other than the one where they obliterate the entire planet’s economy?

After all, their “business” is to borrow money from depositors and make a profit from loaning it out to people who need some credit.

If you sell SAUSAGES you don’t charge the farmer for the space on your shelves that his sausages occupy – and then tell him he’s getting a “good deal” and “free sausaging” when you don’t charge him so long as he keeps you in stock with sausages but if you run out then, oooh, he’ll get a stern letter and you’ll charge him twenty quid. So why do BANKS think that they can operate that way?

It all seems a bit RICH (irony intended) that they want to CHARGE us for the privilege of them making profit out of OUR MONEY!

Anyway, it turns out that all of us really ought to be sending a stern letter to the Royal Bank-that-we-own of Scotland and the other Bank-that-we-own of Scotland to say: “you have exceeded your arranged overdraft limit by sixty-two billion pounds; please arrange a meeting at our office to explain yourselves. You have been charged twenty quid for this letter.”

There is, of course, something deeply dubious about keeping HUGE loans a secret for all this time and covering up just how CLOSE we came to having a major British Bank actually run out of cash and there ought to be a proper inquiry!

FORTUNATELY, though, we hear that the Banks have all learned their lessons and are no longer speculating on wild investments and securitisation schemes, and instead have put all their money into a nice safe property deal in DUBAI. At least THAT won’t be built on SAND.

Sorry, it’s WHERE?

Oh fluff.

Anyway, getting back to Pre-Budget Report and the DEFICIT between what the Government spends and what it raises in taxes, one thing you CAN see is that Hard Labour’s tough talk on curbing bonuses is ACTUALLY laying the groundwork for hitting the banks with a WINDFALL TAX, which will be both popular in sticking it to the new national hate figures and practical in clawing back a chunk of their profits in order to help close a little bit of that HUGE GAP in the budget.

Unsurprisingly, the banks have criticised any windfall tax plan on the grounds that they don’t LIKE paying tax… no, sorry, on the grounds that taxing them MORE takes money out of the banks and make their lending more risky again. In just the way that paying vast bonuses does. Er.

In fact, Liberal Democrat Shadow Chancellor, Mr Dr Vince “the Power” Cable has already suggested that the taxpayer ought to be charging the banks a LEVY, like an INSURANCE PREMIUM or FEE, in return for the de facto GUARANTEE that the Bank of England will bail out anyone who looks like going Lehman Brothers on us. The advantage of the Liberal Democrat scheme is that, like everyone’s insurance, you could relate the fee to the level of RISK, so the Treasury could take back some control over the level of gambling that the City Banks indulge in.

However, the BBC’s Mr Robert “Hey” Presto is reporting that rather than tax the banks DIRECTLY, Chancellor Sooty will put a SUPER-TAX on the BONUSES. Which sounds like it will be popular (not to mention a little bit vengeful). In the long run, this will just invite the lawyers and tax accountants to start work on redefining senior bankers’ earnings to say what is salary and what is bonus until they can avoid Mr Sooty’s super-tax. But in the short term it plays well to the new CLASS WAR agenda that Hard Labour are developing as their General Election strategy.

It is clear that Hard Labour’s top strategists Lord Mandeltine (Darth Sideous) and Mr Alistair Henchman (freshly returned to Downing Street) have hatched a plot to try and show the Government as protecting front-line services and hardworking families while the snooty upper-class Conservatories’ policies are to benefit themselves.

Now, in fairness, this is because the Conservatories’ policies ARE to benefit themselves: Mr Balloon and his incompetent purse-carrier Master Gideon Oboe are both among the just 2% of families to benefit from their CENTREPIECE tax policy of cutting Inheritance Tax; and candidate Zac Goldfinger hasn’t helped his Party any by claiming “non-dom” status for “a few tax benefits“.

But linking their obvious SELF-INTERESTED policies to where they went to SCHOOL, while it plays well with the Prescot wing of the Labour Party, allows Mr Balloon to side-step the REAL point and shed more-in-sorrow-than-anger crocodile tears about “petty” attacks.

Nevertheless, expect more of this sort of thing as the election battle becomes more DESPERATE.

In the meantime, we have the PBR getting heavily trailed, with the Chancellor giving off-the-record briefings to selected newspapers and then coyly telling Mr Andy Marrmite that it’s all “speculation”. And we hear about Mr Frown pre-announcing “twelve” billion pounds of efficiency savings (by which he means THREE billion pounds of efficiency savings plus the savings he’s made already… so they don’t ACTUALLY count because they’re ALREADY in the Budget which STILL has a huge gap in it!).

Expect the line to be about the Conservatories cutting your services and Hard Labour defending them.

One last thing: hanging over all of this is the Climate Change Crisis and, with the Copenhagen Summit starting this week, just what – if anything – the Parties are willing to PAY in order to save the World. Mr Balloon’s Vote Blue Go Green seems to have been so much HOT AIR, as his policies have withered on the vine in the economic storm. Hard Labour, on the other fluffy foot, only seem interested in building atomic power stations, rather than investing in the future with a green economy. In contrast, the Liberal Democrats GREEN TAX SWITCH is still a key part of our policies, to give people money back and let them make the right choices for saving energy and cutting CO2.

Finally, my recommendations for the month: have a MERRY CHRISTMAS… and tell everyone how much MERRIER a Christmas they could have if they voted Liberal Democrat to raise everyone’s tax allowance, cutting income tax bills for all low and medium earners and giving millions of people up to £700 back!

Luv from Millennium.

And I shall see if I can talk the awfully nice people at Liberal Democrat Voice into letting me return in the New Year with my ALL NEW General Election Diary!

Meanwhile, read my diary!

This week the spotlight switches from bankers’ bonuses to government deficit. The collapse of the banks and the recession has devastated public finances. In Wednesday’s Pre-Budget Report, taxpayers will get the bill and the debate will begin as to who pays and how and when. … Unless painful budget measures accompany a fairer tax system, the public will be very angry. … There has to be a clear plan to bring the finances back into good order. Otherwise, there is a serious risk of a collapse of confidence leading to much higher interest rates and a weaker economy for a long time. It will not occur this side of an Election. …

I guarantee, on my party’s behalf, that we are prepared to take unpopular decisions – albeit with a commitment to distribute the burden fairly.

Timing is very tricky. Rushing into painful cuts or tax rises will plunge the country back into recession. … The Liberal Democrats and I have already indicated some of the programmes that could go: ‘baby bonds’, tax credit for high earners and identity cards. There will be defence cuts, providing these don’t affect the kit for our soldiers in Afghanistan; the Trident missile system is one item for the long term. Unless politicians spell out priorities, we shall get indiscriminate, damaging cuts to valuable services. …

Taxes should be cut for those on low and middle incomes by lifting the income tax threshold to £10,000
a year, £200 a week. This should be paid for by removing tax reliefs which enable the very well-off to avoid income tax. I am sticking with the idea of a mansion tax, a one per cent charge on property over £2 million. This is also a way of getting non-doms to pay tax; you can’t move a mansion to Monaco or the Caymans.

If we are looking for more tax money, the place to start is with the banks. Some are making very large sums on the back of a taxpayer guarantee and we should demand a fee for this – ten per cent of profits. These are the people who got us into this mess and splattered the nation’s account in red ink. They should get out of their pin stripes, roll up their sleeves and take the lead in cleaning up.

You can read Vince’s article in full here.

And you can watch Vince call for a tax on bank profits courtesy of BBC News here:

In his speech to The Civilisation Congress, Vince notes that the UK has one of the worst records for infrastructure investment in the OECD, and argues that there is an urgent need for a step change in infrastructure investment to create jobs, increase competitiveness, promote environmental sustainability and boost the economic recovery. Creating a National Infrastructure Bank – leveraging public funds with private capital – is, he argues, the best vehicle, especially with private investors beginning again to look for good long-term opportunities.

Here are the highlights from Vince’s speech:

There is a big hole in the prospects of the long-term recovery and growth of the UK economy.

Our infrastructure is currently rated 34 th in the world, which is poor by anyone’s standards. The Policy Exchange estimates that £500bn needs to be spent over the next decade on transport, energy storage, broadband and transmissions systems.

But in this recession, infrastructure investment is one of the first things to be squeezed and there is currently no prospect of investment on anything like the scale that is needed.

The Government’s commitment to investing in the UK’s long-term infrastructure needs has been woeful. The Tories at least recognise that there is a problem but once again the public rhetoric is not backed up by any kind of concrete and viable solution.

The PFI model is no longer fit for purpose due to its over dependence on bank finance. Indeed, the current PFIs are having to be underwritten by Government lending. Bank borrowing has become more expensive. Private equity may also be a victim of the credit crunch and, in any event, tends to have a five-year perspective. There is a shortage of Government money for public interest projects where social returns significantly exceed private returns.

The government is cutting back in public investment (by 20% per annum in the next three years).

So what can be done?

I believe that what we need is a mechanism for reducing the cost of capital – through Government guarantees – while tapping in to private savers’ demands for long-term investment. That is why I am proposing the creation of a National Infrastructure Bank.

The idea of an Infrastructure Bank is not new. Bodies like the European Investment Bank already do this on an EU level (and the World Bank in developing countries). There are already institutions in the UK, albeit in a fragmented form with a great deal of expertise in this area. But what I am suggesting would bring the current Government facilities together rather than reinventing the wheel. The Government has already announced Infrastructure UK but the last thing that we need is yet another advisory body talking shop.

A National Infrastructure Bank would tap into the demand from institutional investors – pension funds and insurance companies – for long-term investment opportunities and from retail investors.

Government would provide guarantees but the National Infrastructure Bank would be professionally managed and make investment decisions on an objective, project by project basis. It would not be a nationalised industry.

There are various financing structures that can be envisaged involving different combinations of private and public equity and loan (or bond) finance and different governance structures. The simple point is that large-scale infrastructure financing will not happen, except in exceptional cases, through private markets alone and government cannot afford to fund public investment directly. There are various models available like the European Investment Bank that suggest a possible way forward.

We believe that you can judge a country by the quality of its infrastructure. Our transport system was once the envy of the world: it can be so again. We have masses of talent and skills that need to be harnessed and savers looking for reliable investment opportunities. A National Infrastructure Bank would also help to provide jobs, which in this time of soaring unemployment is more important than ever.

The big lesson from this crisis is that we can’t return to business as usual. The country needs rebuilding and restructuring. An ambitious proposal like this would be a useful and important step in that direction.

We are in the teeth of one of the most difficult and unpredictable recessions we have ever faced.
The origins of the recession, at the heart of the financial services sector on which we have relied too heavily for far too long, begs profound questions about how we can rebuild the British economy on a different, more sustainable footing in the future.
As the CBI said this morning – this recession can be a catalyst for positive change.
In the short time we have today, I want to run through the five main areas where I believe urgent action is required not only to foster a rapid recovery in the short term, but to shape a new competitive, sustainable economy for the long term.

• First: stabilise, decontaminate and re-balance our financial industry.
• Second: a strong, credible plan to sort our Britain’s finances, to maintain confidence in our credit-worthiness.
• Third: invest in infrastructure, to create jobs now and the right environment for sustainable growth later.
• Fourth: decentralise decision-making and business support to drive growth in industries and regions that have been left behind
• And fifth: change our tax system to put money into the pockets of people who both need it and spend it, helping rebuild consumer demand.

Number One: The Banks
First, financial services, and especially banking.
I believe we need to revisit the fundamentals of our banking industry. We need to ask ourselves: what are banks for?
The simplest answer, in my view, is this: banks are there to keep depositors’ money safe, and to provide credit on a prudent basis to individuals, households and businesses.
That simple vocation was lost in recent years as the deregulatory Big Bang of 1986 gave way to overleveraged and highly risky financial services innovations which put the whole financial system, and so our whole economy, in jeopardy.
The first thing we must do now is get the banks lending – not to excess, as before, but responsibly.
It is unacceptable that, when taxpayers actually own a huge proportion of the banking industry, credit still isn’t flowing as it should.
Of course, in the long term, we should be looking to divest ourselves of these banks.
And government shouldn’t make a habit of interfering in the day-to-day running of businesses.
But at a time like this, when smaller businesses that don’t have access to capital markets often cannot get credit at reasonable rates…
When banks are upping charges, fees and rates even for businesses they’re already lending to…
Taxpayers’ representatives at these banks shouldn’t just be suggesting a change of strategy, they should be insisting on it.
Next, we must ensure that the high street banks on which consumers, households and small businesses depend are never again put at risk by the casino culture of investment banking.
As the governor of the Bank of England has repeatedly recommended, we need to separate high street and investment banking for good.
There are of course many people who claim this is either undesirable or impossible to achieve in practice.
I believe they are deluding themselves about the scale of change needed if we are to ensure that the implosion in banking which has taken place does not occur again.
Of course, no single model of banking provides a guarantee against failure.
But it seems to me that the refusal to properly insulate low risk banking from high risk banking serves as an invitation for history to repeat itself.
Until this split can be introduced, the banks will remain the beneficiaries of a unique, open ended guarantee against failure from the taxpayer.
I believe they should have to pay for that guarantee.
That’s why last week, we proposed a new, temporary banking levy of 10% on the profits of the banks until such time as they can be split up.
Finally, we need far greater competition and devolution in the way our whole banking system operates.
We should be using the taxpayers’ stake to break up the big banks so that we can rebuild the kind of local banking and lending infrastructure we need in which banks are once again in closer contact with their own customers.
We need more of the building societies and credit unions that used to be the bedrock of British financial services – a power shift from the big beasts of global finance back to local people, businesses and their communities.
Number Two: Credible plan to reduce the deficit
The second area of action is a credible plan to reduce the deficit.
It is vital that we maintain the credit-worthiness of Britain with a clear and convincing plan to reduce government borrowing and to eliminate the structural element of the deficit – that part of the deficit which will not be eliminated by future growth…
Currently estimated to be in the region of £90bn.
Unfortunately, the debate over deficit reduction is currently generating much more heat than light.
The British people are being confronted with a false choice: Labour says they will eliminate the deficit over the next eight years.
But they are living in a state of denial about the need to cut public spending to achieve that.
Meanwhile the Conservatives are talking a tough game about how inadequate Labour’s plans are.
Yet they are playing hide and seek with British taxpayers because they won’t announce their plans until after the election.
The British people deserve better. They deserve to be treated like grown ups.
I know the CBI believes eight years is too long over which to eliminate the deficit.
It may prove to be – and it may also be that the structural deficit is larger than current Treasury estimates.
None of us yet know.
We have to be flexible as well as responsible in our approach. In my view, credibility is the most important thing.
It would be foolish and dangerous to propose rapid cuts that would cause so much economic and social disruption that they simply cannot be delivered.
Remember: the structural deficit is about £90bn – almost enough to pay for the entire NHS.
Removing it will be painful, come what may. And while the economy may be at the start of recovery, it could be on the edge of a double-dip recession.
A premature fiscal contraction could cause a lot more harm than good.
In that context, I think eight years is a reasonable starting point.
The big question, the one to which neither of the other parties has yet provided an adequate response, is how to achieve it.
In meeting this challenge, Liberal Democrats will be guided by three basic principles.
First: A preference for spending cuts rather than tax rises.
As I said earlier, we will introduce a new tax on the profits of banks, to ensure they pay for their taxpayer guarantee. That will raise about £2bn of what’s needed. But otherwise our focus is on public spending.
The second principle is to focus on big areas of state expenditure, not relying on vague promises of efficiency savings.
We are looking for big areas where the government simply shouldn’t be involved, or should be radically scaling back spending.
Savings in paperclips, pot plants and general efficiencies are not enough.
The third principle is rigour. We will provide costed plans with as much realistic detail as we can.
Some of the big decisions which have to be made – like reforming public sector pensions or not renewing the Trident nuclear missile system – will take time to produce major savings.
Others, like public sector pay, ending tax credits to above average income families, or cancelling some high profile Government schemes like the Baby Bond, will have a short term impact but will be very controversial.
We have already gone far further than any other political party in spelling out in detail a series of proposed cuts and savings.
We will build on that work with further specific proposals for additional savings and cuts.
Anything less will rightly be regarded with scepticism by businesses and the public alike.
Anything less will make it all the more difficult to protect front line public services even as we pay down this enormous structural deficit.
I hope that when we spell out our plans in further detail we will have the backing of the CBI.
I recall from my days as an international trade negotiator that businesses tended to be in favour of free trade for every sector except their own.
I suspect the same might apply to public spending: we shall have much enthusiasm for cuts in general but howls of protest if it affects particular contracts or sectors – be it IT systems, defence procurement or business support schemes.
You are rightly urging the political class to get real – it is a realism which we will all need to accept.

Number Three: Investment in infrastructure
Third, improving Britain’s infrastructure.
It is important, as we reduce the deficit, that we do not put Britain’s long term future into jeopardy by cutting back capital spending.
That would be a false saving, costing less today but costing us all a lot more tomorrow.
Good infrastructure is crucial to competitiveness and growth.
But our built environment, transport and energy infrastructure show badly the effect of neglect. The most expensive train infrastructure in Europe. The worst insulated homes.
An energy infrastructure barely capable of dealing with new generation technologies, and so outdated we risk blackouts in coming years.
And yet, astonishingly, the government is about to make it worse, slashing back capital spending by nearly £17bn next year.
It is economic madness to put infrastructure spending first on the list for cuts.
It should be a priority if we want to put in place a framework for future sustainable growth.
So, in our manifesto, Liberal Democrats will be proposing a switch from current spending to capital investment in our first year – protecting the vital investment our country needs.
And later this week, we will be spelling out in some detail our ideas for a National Infrastructure Bank, to leverage government investment, so that the money available goes further, and private and institutional investors can be part of building Britain’s future, while making a decent, reliable return.
Number Four: decentralise
Fourth, the need for radical economic devolution.
Infrastructure investment, in particular in transport, will give an economic boost to parts of the country outside London.
But there is more we should do to ensure growth returns more broadly across the whole country.
Earlier this year, Richard Lambert proposed re-establishing the old Industrial and Commercial Finance Corporation, a public-private partnership investment fund that provided equity and debt backing to small and medium-sized businesses from the 1940s on.
It filled the gap between where banks left off and the Stock Exchange could take over.
The ICFC invested through a network of regional offices, which had strong local and sector knowledge.
In its lifetime ICFC provided investment capital to over 11,000 businesses.
So I’ve asked Vince Cable and my business team to look into how we could re-establish an ICFC-like investment fund, with a strong local and regional basis.
It could look to provide venture capital, including from private investors, as well as equity and loan backing, adding a new string to the bow of the old ICFC.
And it could work in concert with a new network of regional stock exchanges offering a route for regional businesses to move into public equity without the huge risks and costs of a London listing.
Creating sustainable, diverse growth across Britain and across our industries.
Number five: tax
The final building block of the Liberal Democrat recovery plan is tax reform.
My basic philosophy on tax is this: a fair tax system should reward hard work, enterprise and initiative.
It should penalise pollution or other threats to the common good.
It should bear down on unearned wealth.
And it should be simple to understand and administer so that everyone, from small businesses to large, from low paid workers to the very rich, play by the same rules.
At the moment, we have a tax system which fails every one of those tests.
That is why the Liberal Democrats will make fundamental tax reform one of the key planks of our General Election manifesto.
And let me reassure you: we will be proposing a tax switch, not a tax rise.
With the exception of the new, temporary banking levy, the changes we propose will be tax neutral – they raise money from one part of the tax system to give money away in lower taxes elsewhere.
And the money will be overwhelmingly moved into ordinary working people’s pockets to help increase consumer demand at a time when it is heavily suppressed. Helping your businesses and so boosting rather than suppressing economic growth.
I believe all these changes are both necessary and possible. That is why, despite the continuing anxieties of this recession, I remain optimistic.
Britain is struggling – yes – but we are also an extraordinarily resilient, diverse and innovative nation.
We should have all the confidence in the world that – if politicians get the playing field right – we have the potential we need for a fresh start and a bright future.
By dispersing power, giving a boost to local and regional businesses and industries which have long been neglected in favour of finance, we can create a stronger, more sustainable economy which encourages creativity and innovation, and creates opportunities for people, no matter their background, their home town or their choice of industry.

The grim news that the economy is still in recession makes this dilemma more acute. It also reminds us that Britain is a deeply divided country. In the inflated metropolitan bubble of the City, there is a lot of excited talk about recovery based on a bounce-back in the stock market, city bonuses and rising house prices in posher parts of London.

This is a different world from the communities hit by the slump in manufacturing and construction; negative housing equity is widespread in the Midlands and the North and depressed shopping centres can’t rely on an investment banker or Arab sheik calling by. We are back to a two-nation Britain. …

The monetary steroids keeping the country alive – low interest rates and ‘quantitative easing’ – have to be continued. It is also becoming difficult to see how the Government is going to manage a smooth return to budget discipline. Next year, the Government will run the only country of any significance (apart from Argentina) with a negative fiscal stimulus. The VAT cut will go into reverse in the New Year and the drop in capital spending will make the construction recession worse. The Conservatives opposed even the limited stimulus we have had.

It is only too easy to see how any insipid economic recovery next year could be stopped in its tracks by premature tightening of the budget, which will have an impact on jobs, especially in places more dependent on public sector employment. How, then, do we now tackle the dangerous assumptions that the streets of London are paved with gold and that little can be done to redress the balance?

It is essential that the economically weaker parts of the UK become less dependent on Government and attract more job-creating private enterprise. But an entrepreneurial base does not spring out of nowhere, and some Government activities are essential to support it. …

Tax policy can also work to offset geographical divisions. Raising tax thresholds to £10,000 would benefit millions of low-paid workers (and pensioners) and reduce the burden for those on average pay. The tax cut would be paid for by closing loopholes enjoyed by the relatively wealthy and by taxing their mansions.

The economy is in deep trouble. Perversely, the people feeling the least pain are the bankers who brought on the crisis.

There is a danger that the necessary correction of the public finances will be done in ways which further disadvantage the parts of Britain which are worst hit in every recession. I worry that the country is being slowly torn apart by a yawning gap between a cosmopolitan, rich capital and the rest. Without spending and tax priorities that are clearly focused, that division will grow.

You can read Vince’s article in full here.