Liberal Democrats believe in a limited state and a market economy.  We are naturally cautious about how much of the economy should be taken by the state.  Our party started out strictly opposed to high taxes: ‘peace, retrenchment and reform’.  But the largest share of 19th century central taxation went on the army and navy, and Liberals opposed imperial expansion and geopolitical strategy.  At the local level Liberals taxed and spent, on the ‘municipal socialism’ of water, public health, gas, electricity and transport, against Tory opposition.  From W. E. Forster’s Education Act onwards, Liberals committed government to spend on improving the opportunities and welfare of British citizens; and under Keynes the party also committed to investment in public infrastructure and the promotion of economic growth.  We have even fought an election campaign, in 1997, on a commitment to raise income tax, against comments from Labour strategists to our manifesto team that ‘no-one will ever vote for a party that wants to raise taxes.’

Again in 2024, Labour campaigned cautiously on a manifesto that committed to holding down the three most important revenue-raising taxes, in spite of recognising the enormous backlog of public investment that had built up since 2008 and the challenges of our ageing society and rapid technological change.  The two years since then have further exposed the neglect of our armed services in the face of rising foreign threats and an unstable world.  The Conservative Party denies that there is a serious problem, and is still calling for tax cuts, suggesting that welfare spending that rose sharply when it was in government can be cut back enough to fund stronger defence at the same time. Burnham’s government thus faces some hard choices.  Either it cuts back again on public investment and research and development, as well as squeezing welfare, or it raises taxes to fund both stronger defence and rebuilding our economy.

How should we react, as a responsible opposition party?  The easiest line would be to attack Labour for betraying their manifesto, without saying what we would recommend instead.   The Tories have adopted a radically economic liberal line, assuming that the market will sort most things out and that cutting public spending – after 35 years of privatization and austerity (yes, the Blair Government did not entirely break with the Thatcherite model) – will leave more space for entrepreneurs to flourish.   But the free market model is now questioned even in the USA, while the hybrid Chinese model of market and state capitalism has unbalanced the global economy,  ‘Geoeconomics’ – the combination of political, industrial and economic objectives in state strategies, coherently in China and incoherently in the USA – has overturned many of the assumptions of economic globalization, strengthening the case for participation within a regional confederation, the EU, capable of bargaining with both.

Accepting the case for higher taxes now does not mean rolling over into uncritical support for the government.  It recognises that the country has to spend more on defence – not on more aircraft carriers or F-35 interceptors, but learning the lessons of the Ukraine war, sharing security with our neighbours and investing in homeland defence.  We should be calling for a major programme of tax reform, to sort out the horrifying complexity of our tax code and the loopholes it contains.  We should support welfare reform, under careful parliamentary scrutiny, recognising that housing allowances can only be brought down if more social housing is built and that paths to training and employment are vital elements in reducing the number of young people not in employment, education or training.

The Conservatives make great play with waste and fraud in welfare.  They don’t look at waste and fraud from outsourcing public services, in spite of well-documented evidence of private equity investing in social care and grossly overcharging, the scandal of Ministry of Defence Housing, etc..  A Burnham government will prefer to bring as much as possible back under government control.  We should support greater accountability and autonomy at local government level wherever possible, and reform of taxation to enable local authorities to afford to provide services.  But we should also campaign for third sector provision of public services, as others have argued on LibDem Voice: non-profits managing care homes, cooperatives and charities supporting local welfare. 

Political leadership is about changing the agenda rather than following opinion polls.  Starmer failed to provide that leadership, not daring to explain that economic recovery requires higher public investment, that one of the biggest factors in our rising welfare and health bills is our increasing proportion of elderly people, and above all that national defence and national resilience need transformation to meet foreign threats and natural disasters.  We don’t yet know how far Burnham will attempt to change public assumptions.  But we as a party must stand up to the Telegraph, the Mail and GB News, and set out the hard choices required to revive our economy and strengthen our security.

* William Wallace is LibDem peer, a former vice-chair of the Federal Policy Committee and convenor of the party's 1997 manifesto team.