The Tories’ pledged this week to reverse Labour’s National Insurance tax rises by increasing the UK deficit. Today Labour’s Lord Mandelson accused the Tories – seemingly without a trace of irony – of “peddling deception”.

The Lib Dems’ shadow chancellor Vince Cable is having no truck with the Labservative approach:

Labour and the Tories are as bad as each other. Under both their plans, public finances would be driven into the ground. Whether it’s for tax cuts or filling in the deficit hole, both parties seem to be in a competition to see who can come up with the least credible cuts.

“While Labour resorts to sending home sick nurses, the Tories can’t even tell you what departments their cuts will be made in. The Liberal Democrats have an honest and credible plan to tackle the deficit and a fully costed tax plan to put £700 back in the pockets of average workers.”

As Vince and others in the Lib Dems have noted, the Tories are of course right to say that any increase in NI contributions is a damaging tax on jobs and unfair to employees. Nobody disputes that. But with the UK’s £70 billion structural deficit, no party will be able to say with any credibility that they are going to reverse it unless they can identify the savings to pay for it.

Even David Cameron is on the record saying that any political party which tries to pay for tax cuts through ‘efficiency savings’ is doing nothing more than tricking the public:

The government ‘efficiency drive’ is one of the oldest tricks in the book. The trouble is, it’s nearly always just that – a trick. In fact it’s such a cliché, there was an episode of Yes Minister about it, called ‘The Economy Drive.’ Ministers are summoned, officials instructed, the media prepared for sweeping savings in the running costs of government. And then, a few months down the line, the sheepish-looking ministers and officials come back and say ‘well actually, it wasn’t quite as straightforward as we’d hoped, Prime Minister.’ (David Cameron, ‘Living within our Means’, Speech in Birmingham, 19 May 2008)

So what would the Lib Dems do, and how would they pay for it? Here’s what, and here’s how:

The Liberal Democrats are proposing a fully funded radical change to the tax system. We will raise the threshold at which people start paying income tax from current levels to £10,000, cutting the average working age person’s income tax bill by £700, and meaning that 3.6m will no longer have to pay any income tax at all. We will pay for our tax cut by closing tax loopholes and cutting reliefs that benefit the wealthiest as well as placing a 1% levy on the value of properties over £2m.