Nick Clegg: financial discipline and tax cuts will steer Britain through economic crisis

8 February 2008

Liberal Democrat Leader, Nick Clegg has called for a new era of financial discipline, an end to tax rises, and an economic stimulus package of tax cuts for low and middle income earners, to steer Britain through the coming economic turmoil.

He is extending the Liberal Democrat spending review to find up to £20 billion of government spending that can be scrapped, with the money reallocated to Liberal Democrat priorities.

A full copy of the speech is below (check against delivery):

This is my first major speech on the economy since I was elected leader of the Liberal Democrats.

I wish it were going to be less gloomy.

But it seems pretty clear there are dark times ahead for the British economy. Gloomy is about as good as it gets.

Today I’m going to set out my view of where we are in economic terms, and the direction we need to go in if we’re to ride out the storm that’s brewing.

My starting point is liberalism.

I firmly believe liberal ideas are vital to our economic success as a nation.

I am an economic, as well as a social, liberal.

I am a proud inheritor of a British liberal tradition that has stood up, through the centuries, for free trade, and against protectionism.

That supported entrepreneurialism as well as laying the foundations for the protections of the welfare state.

That understood you can only deliver on progressive aims with the money delivered by economic growth.

In the past, while Labour was enthralled by socialism, and while the Conservatives were getting periodically carried away by economic nationalism, the Liberal Democrats have always supported competitive markets.

And in the modern age, it is liberalism that understands both the market economics that drive globalisation, and the internationalist politics needed to regulate it.

It’s no wonder David Cameron claims to be a “liberal conservative”, and Gordon Brown has hailed our British traditions of liberty.

But it’s the Liberal Democrats who’ve had it right on the economy in recent years.

We were the first political party to call for the independence of the Bank of England.

We’ve spoken out for years about the unsustainable credit bubble that has been used to prop up our economy.

We have in Vince Cable the most credible shadow chancellor – or chancellor – of any political party.

He was right to call for the temporary nationalisation of Northern Rock, while the government and Conservatives spent months dithering over what to do.

I, personally, have a long standing commitment to business and economics.

I managed economic development projects in Central Asia.

I was an international trade negotiator – leading the EU team on China and Russia’s accession to the World Trade Organisation.

I was Trade and Industry Spokesman in the European Parliament, where I pushed through new Single Market legislation in record time, opening telephone markets across Europe to competition.

I did some vital early work liberalising energy markets.

And in Westminster, I was at the forefront of the campaign against the extradition of the Nat West Three.

It’s because these issues are at the heart of my political agenda that I’m determined for the Liberal Democrats to build on our credibility and become the most trusted party on the economy.

In us, you will have a party committed to economic liberalism, to internationalism, to fair taxes, and to competitive, fair markets.

Let’s look at where we are today.

It has been well over a decade since confidence in the British economy has been this low.

There’s no catastrophe yet. Economists are predicting below-trend growth, and weakened consumer spending for the next few years, not yet recession.

But the storm clouds are gathering.

And if the rain does start to fall, my concern is that Gordon Brown has – to stretch the metaphor – thrown out all our umbrellas.

In the last few years egged on by the Government’s own profligacy we have borrowed too much, spent too much and saved too little.

In the harder times ahead, this will come back to haunt us.

Keen to shift the blame, Brown has quickly laid the cause of our current economic malaise firmly at the door of the USA.

But if our problems are merely the fault of the American mortgage market, why has the UK been so much worse affected than anywhere else?

Why is it only the UK who has seen a run on a bank?

The reality is that many of our current problems started far closer to home.

Gordon Brown must be given credit where it is due.

Since coming to power in 1997 he presided over a decade of solid growth. His boasts may have been a little over the top – like proclaiming the longest period of growth since the dinosaurs, or whatever it was.

But while problems beset other countries, in Britain consumer spending, employment and growth did all remain high while inflation stayed low.

Unfortunately this growth was not built on firm foundations. Not even Gordon could abolish the business cycle.

By 2003 consumer debt was expanding at a rate of over £10bn a month.

Much of this borrowing was based on house prices which were increasing by over 20% a year.

These price increases were partly because of a housing shortage in some areas, particularly the South East, as household growth and immigration drove demand far faster than supply.

And partly because of massive speculation by people treating home ownership as their main form of saving and investment, propped up by reckless lending on the part of some banks.

Meanwhile we saw an explosion of investment in the public sector which further drove growth.

For the first time in a quarter of a century the growth of jobs in the public sector was higher than in the private sector.

The Liberal Democrats supported this investment in public services: after years of under investment, it was vital.

But because of the Government`s failure to address structural weaknesses in the economy, these conditions now combine to create the conditions for a perfect economic storm.

The collapse of the US mortgage market is not the reason for the economic turmoil we now face.

It was just the catalyst.

Our economy has become ever more dependent on the availability of cheap credit – without it, we’re in trouble – as the directors of Northern Rock were the first to discover.

With the cost of credit seriously affecting people’s spending power, a lower level of growth in the UK economy is now inevitable.

A fifth of our income is now used purely to maintain the debts we already have, while the ratio of debt to income is historically unprecedented.

It is hardly surprising then that as a country we are tightening our belts and spending less.

This will open up a considerable hole in the Government’s finances.

Gordon Brown finds himself in a sticky situation, with a rapidly slowing economy, strong inflationary pressures and no money in the Treasury’s coffers.

There’s no wiggle room in fiscal policy to stimulate growth: even with the tight spending plans imposed under the Comprehensive Spending Review, the Institute for Fiscal Studies has identified an £8 billion shortfall.

By spending all the money in the years of plenty we have backed ourselves into a corner unable to cope with these leaner years.

The Prime Minister now finds himself in the unpalatable position of having to either raise taxes or abandon the fiscal rules on which he built his reputation.

Of course, one of those fiscal rules went down the toilet last night. Somehow I don’t think this is a happy morning in the Treasury.

It isn’t just Brown and Darling’s hands that are tied, though.

There isn’t much wiggle room in monetary policy either.

Our tight inflation target, which doesn’t take house prices into account, has left the Bank of England hamstrung.

While it has found space for a quarter point cut, it’s impossible for us to follow the Fed and slash interest rates to boost the economy while wage demands, the cost of oil and high food prices continue to drive up inflation.

Overall, we’ve managed to get ourselves into a situation where our economy is too fragile to withstand a serious external shock.

So the first thing to do is work out how we can protect ourselves from getting into this situation in the future.

To better stabilise our economic management, the fiscal rules should be independently monitored.

Remember last year when Gordon Brown was about to break his fiscal rules – and conveniently discovered the economic cycle was longer than his previous estimate, so he had a few billion pounds to spare after all?

The government can’t go on marking its own exam papers. We need an independent body to analyse our fiscal position.

But more than that, we need to accept that the fiscal rules are now wholly discredited. Over the next few months, I’ll look in depth at how we can build a new system to restore confidence in fiscal management.

The Bank of England’s remit needs to be altered, too.

The measure of inflation the Bank targets doesn’t include housing costs, so it bears little resemblance to actual inflation.

Excluding a measure that has such a profound impact on our economy is daft. It means the Bank can’t act to counteract pressures that cause prices to spiral – or to counteract a potential crash.

Devising ways to stop us getting into this economic hole again in the future are important.

But they aren’t enough.

It’s like the old joke about the man who got lost, asked for directions and was told “I wouldn’t start from here”.

It doesn’t help very much.

We are where we are.

And it’s the job of an opposition party not to crow “I told you so” from the sidelines, but to propose an alternative.

There may be difficult times ahead but notwithstanding our fiscal position there are things the government could – and should – be doing to cushion the blows.

That’s one of the reasons I’m so frustrated by the Conservative party.

All they have to say is “I wouldn’t start from here”.

Take Northern Rock.

My colleague Vince Cable was quick to assess the situation and propose what I still believe would be the least worst option: temporary national ownership of the bank, to best protect the taxpayers’ investment.

It’s clear the government knows that’s the best idea on the table, but they’re too afraid of their past to go ahead with it.

Instead of nationalising Northern Rock, they’ve nationalised the risk, and privatised the profit.

But what have the Conservatives got to say?

Nothing. They’ve taken up our proposals for better deposit protection and stronger banking regulation so there’s never another Northern Rock.

But they don’t have a single concrete proposal or idea about where we go from here.

That’s just “I told you so” politics. And it offers nothing for Britain.

It’s an attitude that has taken the Conservative party into a confusing series of half-promised tax cuts and half-promised spending commitments.

I will never take that approach.

The Liberal Democrat approach to the economy, and to public spending, will always be responsible.

First and foremost, we need to accept that our fiscal position is in such a mess that we must be extremely firm on public spending.

It’s time for a new approach, based on financial discipline. We simply don’t have additional spare money to pour into our public services.

That doesn’t mean giving up on improving services – or using them to tackle inequality, and improve opportunity for British families.

But it means focusing on “how”, not “how much”.

I’m committed to reforming our public services, making them more personal in nature, and using them to empower individuals, families and communities.

I outlined proposals on localising the NHS at a Public Services Summit just this morning.

And last month proposed ways to free our schools to deliver a better education for all.

By changing the way our public services operate, we can deliver more with less and continue to improve our health and education even through an economic downturn.

We mustn’t let public services pay the price for economic mismanagement.

But that means we have to make sure every penny is spent well.

It’s the end of the line for unaffordable public sector pay deals. We need pay that rewards great service delivery and best practice, not just a fixed national pay policy.

(You can read the second half of Nick Clegg's speech here).