Speech by Vincent Cable, Deputy Leader & MP for Twickenham, at the Brighton Conference, 17 September 2007

5.27.28pm BST (GMT +0100) Mon 17th Sep 2007

The last three elections were won by Labour for one major reason: The economy.  It remains Gordon Brown's main weapon; and his Achilles Heel.

The British economy may have been reasonably successful but it is also highly fallible.  The House that Gordon Built may not be built on sand but it has certainly been built on a floodplain.  It has yet to be fully tested against rising economic sea levels, though the events of the last week suggest that it may be very soon.

The water is now pouring through the defences after the near collapse of Northern Rock; a product of greed and reckless gambling by overpaid executives; lax, indulgent bank regulation; and a complacent Government.  I warned Gordon Brown of a looming debt crisis four years ago.

The seductive narrative of Gordon Brown's moralistic social democracy also bears little connection to the reality of modern Britain in which amoral and anti-social behaviour by the 'super rich' is given free rein; where the poor are hounded for small over payments of benefit and the super rich can pay no tax; where a city is refused a super casino but our country is turned into the world's super casino for speculative investors.

The Treasury team has commissioned a YouGov poll into public attitudes.  Over 80% thought that the gap in earnings between rich and poor, and the gap in wealth and property were too large.  84% - and even 80% of Tory voters - thought Chief Execs of top companies were overpaid; the most common word used was 'obscene'.

How sustainable is the Brown Economic Miracle?

This current boom does not depend on long term investment or on exports or on the cultivation of a more educated, skilled, labour force.  It is powered by debt financed consumer spending, some reckless lending and the optimism generated by a house price boom.  Household savings have virtually collapsed in the rush to spend. Personal debt has more than doubled in a decade to well over 1 trillion pounds.  Almost 20% of all household income is now set aside for debt service; as against 13% in 1997.  For first time buyers the figure is around 40%.  I have been warning of this for over three years.  But repeatedly, and complacently, Gordon Brown denied that there was a problem.  Now, those who are over borrowed, or suffer loss of income, job, illness or relationship breakdown, are increasingly unable to pay.  Every day nearly 300 people face insolvency and 75 family homes are repossessed; Gordon Brown must take personal responsibility.

The United States has already produced a lending crisis built on the back of high risk credit, such as NINJA loans; to people with 'No Income, No Job and No Assets'.  Yet some of ours have done the same; and this is high street banks - not just the cowboys.  When I ask our banks why they are behaving recklessly, lending four, five, six times peoples' income they say: 'what is the problem?  80% of our loans are secured against borrowers' houses.  And, as we all know, property prices can only go up?'  They say.

We can see the frenzied signs of collective madness which always accompany an economic bubble.  From Dutch tulips to dotcom shares to Japanese land prices, and now UK house prices, we see banks and individuals entrusting their money to a market which seems to offer a one-way bet.  Until it bursts the bubble has a logic of its own, inflated by uncontrolled credit expansion and rampant speculative demand.

Symptoms include not just the buy-to-let market but the buy-to-leave market.  Every village in Cornwall, the Lake District or Wales, knows what happens when outsiders buy up local cottages and leave them empty.  Speculative investors have been doing the same across the South East.  Developers sit on land banks.  There are three quarters of a million empty houses, roughly the same number as the alleged shortage.  Many others are under-occupied.  Yet the Government's answer is to blame local councils and planning rules and it threatens to destroy the delicate balance between development and overdevelopment.

My qualities do not include clairvoyance.  There is no Mystic Vince.  The press can't foresee the future either. But I deeply distrust the professional optimists - the banks, estate agents, government ministers - who seem to believe in an economic version of levitation.  History tells us that bubbles burst; and every housing boom is followed by a crash whatever the papers say. This is something Gordon Brown understood ten years ago when he said in his first budget: "I will not allow house prices to get out of control and put at risk the sustainability of recovery".  But that is exactly what he did.  Why?

Why did he exclude housing from the measure of inflation?  Why did he not give the Bank of England responsibility for this, the most important and destabilising element in inflation?  Why has he taken 10 years to produce a housing policy?  Why was council and other social housing drastically curtailed forcing families into owner-occupation they cannot afford?  Why was he so frightened of tackling the banks over debt promotion, unfair charges and irresponsible lending?  As long as the boom has gone on, he has been able to avoid answering these questions but his day of reckoning cannot be far off. 

Some of Gordon's other chickens have already come home to roost, like the use of public private partnerships to disguise public borrowing.  The collapse of Metronet was an accident waiting to happen.  There was a basic design flaw.  And Gordon Brown was the chief architect.  Such was the complexity of his design that £500m was paid out to consultants and advisers to launch the company - which then failed after four years.  Worse: far from transferring risk, tax payers have been landed with almost all of the debt: at least £2 billion.  The accountants, consultants, and contractors are laughing all the way to the bank.

A similar costly fiasco is emerging from another brainwave: tax credits.  The concept is fine: a system to cushion the working poor from the impact of low and fluctuating incomes.  Yet Gordon Brown's overcomplicated design has brought the Inland Revenue to breaking point.  £9 billion has been lost on overpayment, error and fraud.  Every year 2 million families are being pressed for rapid repayment of money which was received and spent in good faith.  It occurred to no one that complexity breeds error and fraud.  Even now, they are in denial.  The system needs radically simplifying.

These failures cannot just be dismissed as incompetence.  These are, after all, highly intelligent people.  The problem is philosophical as much as administrative.  There is a gulf between socialists and liberals.  Gordon Brown has a deeply ingrained belief in the capacity of the State to achieve both massive and subtle social transformation; and in the capacity of armies of civil servants to improve lives and change behaviour.  Liberals, rightly, are more sceptical. 

In one respect, however, we share the same philosophical ground: a commitment to social justice.  And here we have a paradox.  No British prime minister since Lloyd George has preached about social justice with such fervour.  But, Mrs Thatcher's legacy of income inequality has been respectfully left alone.  Wealth inequality has actually widened considerably since the Tories left office, on the back of inflation in land, housing and financial assets.  The voters have noticed.  Our poll shows that two-thirds of voters believe the earnings gap between rich and poor has widened in the last decade; three-quarters that the wealth and property gap has widened.

Last year we debated with some passion the issue of whether those on high incomes should pay 40 or 50p top rate tax.  Yet the reality is that the super rich pay virtually no tax at all.  Private equity operators pay as little as 10p in the £ - not 40 or 50.  And not just them: thanks to a capital gains tax relief granted by Gordon Brown the outgoing chairman of British Land has recently pocketed £18 million from his property dealings.

Another expensive gift to the wealthy is non-domicile resident status.  Beneficiaries pay no UK tax on their global income including pay and capital gains earned here and shipped out via off-shore trusts.  In 2002 Gordon Brown initiated a Treasury enquiry into the abuses of non-dom status.  The report never appeared.  The Treasury now uses a waiver under Freedom of Information to suppress its findings.  What we do know is that the number of non-doms has shot up from 80,000 to 200,000 in five years, while the average amount of tax they pay has plummeted. Billions of tax revenue is disappearing while low paid workers and the middle class are being taxed to the hilt.  We would curb this abuse.  Our poll shows that the vast majority of the public want such a crack down.

So much for social justice.  St Francis of Assisi was the patron saint of the meek; St Vincent of the poor; St Gordon is the patron saint of the super rich

Now you might say: 'well, at least there is none of the obsequious grovelling to the rich and powerful that was Tony Blair's stock in trade.'  This is the hopeful patter of Labour activists.  But it begs the obvious question: What was he doing for the last ten years.  Take Iraq.  He signed the cheques.  We know now that the cost was £6.6 billion, and is still rising.

Or take another example of Gordon Brown's amnesia:  New Labour's role in perpetuating the agreements, lubricated - allegedly - by massive bribes for the sale of armaments to Saudi Arabia.  The Liberal Democrats have been trying, in the face of unrelenting hostility from both the Government and the Tories, to get to the bottom of the scandal and to ensure that the law on overseas corruption is enforced.  One might have thought the then Chancellor would know that a billion pound in backhanders had passed through the Government's accounts.  But not that Chancellor.   He wasn't there.  He didn't know.  Nobody told him.

For anyone tempted to apply to enter Gordon Brown's Big Tent you will be required to answer two questions.  First, who was responsible for the economic successes of last decade?  Answer: Gordon Brown.  Second, who was responsible for the failures: costly PFIs; tax credit overpayments, fraud and error; collapsing occupational pensions; the failure of Individual Learning Accounts and Film Tax Credits; growing tax complexity; U-turns over company incorporation and Operating Financial Reviews; widening wealth inequality; housing unaffordability; IT systems failures; and Railtrack.  Answer: Someone Else.

Let me now sketch out my priorities.

First, the emphasis on economic stability and steady growth has been right.  Our policy of making the Bank of England operationally independent has been broadly successful.  But the world has moved on in the last decade.  Improvements are needed.  Appointments should be independently assessed.  Inflation measures must include housing.  There must be more attention by, financial regulators, to reckless lending.  The Governor of the Bank of England is absolutely right to send packing those whingeing billionaires in the City demanding a government bail-out from their bad investments and to protect their bloated bonuses.

Second, fiscal policy needs reform.  Independent scrutiny is necessary.  Few people believe that the government is meeting its own fiscal rules. The key flaw is that the Chancellor is the judge and jury of his own policy.  In effect, he marks his own exam papers.  Unsurprisingly he always awards himself 10 out of 10.  The assessment of fiscal policy must be independent of government.

Third, tomorrow we shall debate our proposals for a simpler, fairer and greener tax system, so I shall not dwell on the detail today.  Suffice it to say that unlike the Tories, we have a fully costed, independently assessed, alternative package - leading to a 4p cut in national income tax, financed by green taxes and higher taxes on the wealthy - we're honest about it.

And fourth, the rules governing public debt are now in danger of doing more harm than good.  They have encouraged the Government to conceal debt via PFI.  PFI has a role but it has been used to excess.  There is also a danger now that investment in public transport or social housing will be blocked.  A better way is to ease or scrap the debt limit while requiring public investment projects to be independently assessed for viability.  The private sector can do so much.  But if we are to see the scale of investment demanded by the country's climate change objectives there will be a need for new non tax revenue sources like a surcharge on road freight and auctioning airport landing slots, currently a gift to the pampered airlines.

If borrowing for public investment can be freed up we do not believe higher levels of taxation are needed.  Our spending priorities will be met by cutting lower priority spending.  We undertook to identify £15 billion a year of spending cuts to this end.  When the government spending review is completed, Julia Goldsworthy and I will announce our proposals.  I can tell you that there will be no uncosted promises.  But the electorate will see the point of spending money on the police rather than compulsory ID cards; treating the mentally ill rather than locking them in jail; investing in rail rather than roads; decentralised renewables rather than new nuclear power; supporting front line troops rather than expensive toys for generals and arms manufacturers; investing in smaller class sizes today rather than baby bonds maturing in 18 years time.  We shall combine financial prudence with greater fairness: public spending with a purpose rather than more spending for spending's sake.