To: Nick Clegg, Danny Alexander
cc. Simon Hughes

Dear Nick and Danny,

Next week, the coalition government is to produce its emergency budget. This more than anything else will determine the direction of economic policy over the next few years. It is therefore crucial that it spells out an agenda not only for our straitened financial circumstances but for fairness as well.

While the Liberal Democrats made a great many concessions in the coalition agreement on economic policy, we have welcomed Nick’s insistence that the government will seek to maximise social mobility and social opportunity. Thus far however, details on how precisely this will be done have been lacking. Indeed, amongst the first swathe of cuts announced last month was a number of youth employment schemes. David Willetts’ unfortunate comment last week about higher education being a “burden on the taxpayer” suggests that not only will Liberal Democrat ministers have to continue to remind their Conservative colleagues of the importance of social mobility, but they will have to make the economic case for building a learning economy as well.

For Liberal Democrats of course, social mobility can never be enough. The decision of the Special Conference last month to back the amendment calling on Liberal Democrats in government to ensure that wealth and income inequality does not widen during this Parliament was near unanimous and we were strongly encouraged by your support of it. We also note that in the run up to the election, Nick publicly lent his support for a “Fairness Test” – an inequality impact assessment of any tax rises or spending cuts necessary to tackle the deficit¹. But how is this to work in practice? We note with concern that neither the full coalition agreement nor the terms of reference set out for the new Office of Budget Responsibility makes any mention of the Equality Act 2010 or the statutory obligation within it for all public bodies – including the Treasury – to have due regard to reducing socio-economic inequalities. How will inequality be monitored in practice?

Taxation will inevitably continue to be an area of tension within the coalition. We accept that in drawing up the coalition agreement, a number of core Liberal Democrat policies had to be put to one side. Hopefully we can all agree however that the party must never compromise on the principle of making the tax system fairer. In this respect, we have two main concerns. The Liberal Democrats’ commitment to raise personal allowance was always part of a wider, redistributive package. While the commitment to raising personal allowance has been kept, that overall package has been picked apart by the coalition agreement. Not only does this raise serious questions about how the new policy will be paid for, it means that the policy as it stands will mainly benefit people on above average incomes. What will you do to ensure that this does not happen? At the very least, will you commit to reducing the threshold for the 40p rate of income tax by the same amount that personal allowance is raised? This will not only make the policy more affordable, it will ensure that the tax cuts are aimed solely at people on low and middle incomes.

Secondly, it is crucial that the coalition sticks to the agreement on harmonising capital gains tax rates with income tax. Much of the hysteria about this measure from Conservative MPs and within the right wing press has painted a misleading picture regarding both how capital gains tax works in practice and who pays it. We are deeply concerned that this misrepresentation has not only been allowed to continue but that several government ministers appear to have suggested that the proposals will be watered down in order to quell a backbench Tory rebellion.

This will have severe long term consequences and could bring into question the legitimacy of the coalition itself. If the coalition falters at such an early stage on such a key part of the agreement, it will look dangerously weak and will only embolden those who are determined to see it collapse. The Liberal Democrats in government will look especially wounded. We would strongly urge you to not compromise any further on this issue. At the very least it must not be contemplated without revisiting the Liberal Democrats’ other manifesto commitments for a mansions tax and restricting tax relief on pensions to the basic rate of income tax.

Overall, we believe it is crucial that the burden of deficit reduction does not fall disproportionately on spending cuts. The Liberal Democrats did not sign up to the Conservative formula of cutting £4 for every £1 raised in additional revenue and it would be impossible to pursue such a policy without adversely hurting the most vulnerable in society. The people with the broadest shoulders must take the greatest burden and while the coalition agreement may have failed to spell out how exactly that should be done, we trust that you will continue to press your Conservative colleagues in government on how best this might be achieved.

With this in mind, it seems incomprehensible that we could be contemplating a rise in VAT at this stage. As the Liberal Democrats pointed out before the election, a VAT rise to 20% would cost every person in the country on average £389, disproportionately hurting the least well off who would be least able to afford it. It would also be inflationary at a time when the RPI is already worryingly high.

Ultimately, however, the most crucial tool for reducing the deficit is not cuts or taxation but growth. The economic case for drastically reducing the size of the state to stimulate growth simply has not been made; we are too reliant on global markets and injudicious cuts risk damaging our competitiveness. During the election we repeatedly questioned Conservative dogma on the economy. Much of that dogma is now being rolled out to the media and in government papers. We trust that you will be similarly bold in asserting scepticism about that approach.

Yours sincerely,

David Hall-Matthews
Peter Kunzmann
James Graham
on behalf of the Social Liberal Forum

1. “I am more than happy to sign up to a Fairness Test, so that closing the gap doesn’t bear down on those who already have too little.” Nick Clegg, April 2010. Source: http://www.equalitytrust.org.uk/fairnesstest

Conference, I am speaking in favour of lines 22-23: “a fair and sustainable economy means delivering growth that lasts, through… honesty about the tough choices needed to cut the deficit and put the public finances back in order without damaging vital public services.”

I couldn’t agree more. This is at the heart of how will distinguish ourselves from Labour and the Conservatives during the election.

What I would ask for though, is a little more clarity and demonstration of honesty about what those tough choices will be.

First, how quickly will we try to reduce the deficit? Nobody is saying that we don’t have to take serious steps to address it. Of course we do. But we don’t need to prioritise it over our long term sustainability, services and welfare provision.

I’m an economic historian. If you take a long view, this crisis is not unprecedented, as some politicians will tell you. Britain has had acute public sector deficits before. So have most countries. So we can take a look at what strategies have been tried before and what has worked. The most effective governments have been those that have eased deficits down gradually while still investing in the economy. It does not work to cut and slash at the deficit and public services into the bargain.

Those of you who were at the Q&A with Nick Clegg yesterday will know that I asked him whether the Lib Dem strategy is to try and reduce the deficit within one parliament or, more responsibly, over two or even three. I didn’t get an answer then, so I’m asking again.

Second, we need to be clear that a sensible way to attack the deficit must be a full package of measures, not just cuts. We mustn’t rule out the option of tax rises.

There are a lot of journalists here today. I don’t think they’ve come to listen to me. They want to know what Nick will say in his speech. These journalists have been busy this week, haven’t they? One of them wrote that Nick had told them that he ruled out tax rises – that spending cuts were our only policy in relation to the deficit.

I gather that the official line on this is that he “misspoke” – which means he said it but he didn’t mean it. I appeal to you Nick: say it isn’t so!

It’s not too late. I’m sure the speech is already written. I’m not a journalist and certainly not one of Nick’s speechwriters, so I haven’t seen it. But those same journalists will be sitting in here in an hour or so, probably in the back row, with copies of the script on their laps. When Nick speaks, they’ll cross out every word in it that he doesn’t say, and add in anything he does say that isn’t there.

So please, Nick, give them something to write in: “Lib Dems don’t rule out future tax increases, because we will never do anything to harm vital public services.”

David Hall-Matthews is the Chair of the Social Liberal Forum.

We believe that this policy has to take into account the following issues:

• It could require even deeper cuts in areas like affordable housing, schools and universities that are central for either the growth potential of our economy or to social harmony.
• Tax increases help the stronger in our society absorb more of the pain of deficit reduction. Taxation increases should not only come from individual taxpayers but can be obtained from sectors of the economy like the City of London that generates wealth that is disproportionate to their overall economic contribution.
• Spending cuts of the magnitude required pursuing this approach might result in substantial reductions in public sector employment, particularly in the regions that are more reliant on state funded jobs, like the Northeast.

A more balanced approach would be for tax increases, especially on the wealthiest sections of the economy to be accompanied by spending reductions spread over a period of eight years. We warmly support the party’s determination to resist premature spending cuts given the fragility of the recovery. However the country as a whole needs to weigh the importance of the composition and speed of any deficit reduction effort.

Nick Clegg is spelling out today how the Liberal Democrats propose to pay for its flagship ‘pupil premium‘ policy for education.

David Cameron is continuing to confuse over both the economy and human rights.  Despite the Tory policy of making immediate cuts, we are now to understand they won’t be ’swingeing’.  Meanwhile, he has asserted that burglars lose their human rights as soon as they set foot in someone else’s property, suggesting he is not so much in support of ‘have a go heroes’ as ‘have a gimp heroes’.

Head of the Intergovernmental Panel on Climate Change Rajendra Pachauri’s position is looking increasingly untenable with the revelation that he sat on the discovery that one of the IPCC’s claims about melting glaciers was without foundation before the Copenhagen summit. Other claims are being disputed as well.  With the scientific community still reeling from the University of East Anglia email hacking scandal, it is clear that a concerted effort needs to be made to ensure that climate science is seen to be robust and open to scrutiny.