Lib Dem shadow chancellor, Vince Cable tonight addressed Reform Scotland on the action that needs to be taken to reform banking and protect the economic recovery. LDV is publishing extracts from Vince’s speech, below, including his call to SNP leader and Scotland’s First Minister Alex Salmond to follow the Lib Dems’ lead and state clearly how the Scottish government will live within its budget in the years ahead:

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.