Liberal Democrats Alternative Budget 2001

Introduction by Matthew Taylor MP Shadow Chancellor of the Exchequer

The Macro-economic Background to the Budget

While growth continues and the public finances are buoyant, Britain’s economy continues to be unbalanced. While the consumer sector is buoyant, other sectors such as manufacturing, tourism and agriculture are weak. Given the uncertainty in the world economy, including oil price rises, slowdown in the USA and continuing recession in Japan, these economic imbalances leave Britain in a vulnerable position.

Domestic Demand

Consumer demand continues to be buoyant and confidence is strong. The labour market continues to be reasonably strong despite the weakening of employment growth in recent months. Combined with the planned increases in public sector spending this year this provides reasonably strong domestic demand. However other sectors of the economy are weaker. Investment continues to be weak. Whole economy investment fell 0.5% in the third quarter of 2000, and the average return on capital has halved since 1998. Weak investment has continued to be a phenomenon of both the private sector and the public sector.

International Outlook

Export growth has been surprisingly strong but the uncertainty in the world economy, including oil price rises, slowdown in the USA and continuing recession in Japan may worsen net trade. While the pound has weakened in recent months it is still at historically high levels and has recently risen against the dollar. Imports continue to outstrip exports making a negative contribution to growth.

Summary of Economic Prospects

The manufacturing and farming sectors have been particularly badly hit by the high pound. Britain’s real short-term interest rates are also still more than double the level of those in the rest of Western Europe – at around 5% versus 2%, damaging Britain’s exporting industries and costing mortgage payers on average around a £1000 a year more. While the pound is somewhat lower than a year ago its high level against the Euro is still a major problem for British exporters and those facing imported competition. The evidence is mounting that Britain’s manufacturing sector is struggling as a direct consequence of the high exchange rate and interest rates. The recent job losses at Corus and the slimming down of British sourced components at Nissan are only the high profile results of these problems. Business investment growth is stagnant and Britain’s export performance has been weaker than expected given the revival of growth in the Euro zone. Manufacturing employment has fallen by over 200,000 since the last election. Manufacturing output growth outside the high technology sectors has been close to zero since 1996. This is causing both short-term pain to regions particularly dependent on exports, and longer-term problems to British industry through low investment. In short, Britain’s economic imbalances between consumption and investment continue to be a problem despite a buoyant economy.

The Euro

That is why we have accepted the report of our Expert Commission on the Euro that suggests an entry rate to the Euro of €1.25-€1.45 to the Pound, compared to the current level of around €1.58 : £1. An overvaluation of 15% still leaves us some way until we are ready to join the Euro. The Government could help to achieve this by making its exchange rate targets for joining the Euro clear, but it also needs to ensure the exchange rate is taken into account in its policy setting.

Fiscal Policy

For all these reasons, we believe that this year’s Budget should be broadly fiscally neutral to avoid forcing up interest rates and pushing up the pound still further. That means no big tax give-aways, which would only stoke consumer demand and worsen the economic imbalances presently being experienced. The Chancellor therefore has to make a choice in his budget between his planned tax cuts and early investment in public services. Our choice is clear and unequivocal – investment in schools, hospitals and pensions, before tax cuts. The Liberal Democrats were the only party to propose independence for the Bank of England at the last election. Labour adopted our proposal, but we would go further. In future, to stimulate a more considered debate on this key macro-economic issue of a trade-off between monetary and fiscal policy, we would require the Bank of England’s Monetary Policy Committee to publish 60 days before the Budget each year a ‘Fiscal Assessment’. This would set out the present impact of fiscal policy on interest rates and the anticipated effect over the year ahead, on existing plans and likely alternative options. We would also make members of the Monetary Policy Committee more independent by giving them non-renewable terms, and seek appointments more representative of the UK as a whole. We will also make the appointments system more open and transparent.

A Green Economy

We would publish a full ‘Green Book’ at the time of the budget assessing its sustainable environmental impact. But longer term changes are also necessary. We regard it as essential to make a major shift in taxation from ‘goods’ like wealth creation which benefit Britain to ‘bads’ which are harmful like pollution. We also want to support green technology and environmental sunrise industries. We will establish a standing Green Tax Commission to make clear recommendations on reforming the tax system, observing the principle that increases in environmental taxes should be offset by tax cuts elsewhere. Green taxation will involve taxing differently, not taxing more.

No Stealth Taxes

Our policies are guaranteed because we explain exactly how they will be funded. Unlike the other parties we will not pretend you can get something for nothing, and they should not pretend you can cut taxes without cutting public services. In this Alternative Budget we explain exactly what we will do and what it will cost. Each year in Government we will send every tax payer a Citizens Tax Contract – a simple explanation of what people are paying in tax, any tax changes introduced by the government that year, why, and what they are spent on. This means that the Liberal Democrats can now be the first British political Party to guarantee that in the next Parliament there will be no new stealth taxes.

Cutting Tax on Incomes

Whilst our first priority is to invest in education, health and pensions, we have made it clear that as resources allow we would also wish to reform the tax system to reduce the tax burden on the low paid, and take those on the lowest incomes out of tax altogether. We would do this by replacing the 10p tax band with a zero rate. This would mean that 1.5million people would be taken out of income tax altogether, and income tax on others on low incomes would be cut. Our 1p on the basic rate of income tax would therefore only raise peoples tax when they earn more than average (£22,000 a year). This would also simplify the tax system. Prior to the Budget, it is impossible to be certain of the amount that the Chancellor has available to him. The IFS however estimate that he will have £3 billion to £4 billion to allocate, in which case it would be possible to fulfil this policy this year, in addition to the spending pledges outlined in this Alternative Budget which are fully funded by the tax changes we propose.

OUR GUARANTEE

This alternative Budget makes clear the Liberal Democrat priorities. More doctors, nurses, and beds to sort out the rationing and long waits in the NHS. More teachers, books and equipment, and an end to tuition fees, to give Britain world class education standards. We also want higher pensions, especially for older pensioners, to guarantee a decent old age, and reduce means testing - and more police on the beat, to improve everybody’s security and tackle crime. This cannot be done for free – but it is affordable. Just 1p on the basic rate for all but the richest 1% of taxpayers, who will pay a little more, will cost typical taxpayers just £2 a week – but put all those small amounts together, and we can transform the lives of people in Britain. That is why Liberal Democrats alone can guarantee to transform for good, hospitals, schools, pensions and security. We believe these are the priorities people want, and look forward to putting them to the British people.

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Freedom to Live: Health

The Liberal Democrat Alternative Budget will provide extra money for health. We will fund this from part of the revenue from a new top tax rate of 50p on income over £100,000, and by closing loopholes in capital gains tax. This will allow us to make significant improvements to the NHS. Our proposals to do this include:

• Provide training places for an extra 3,300 doctors and 11,400 nurses and midwives over five years. This means an extra 2,500 places for doctors and 7,500 for nurses on top of those that the government has planned in the NHS National Plan. We would also provide 7,600 new training places a year for professionals allied to medicine such as occupational therapists, podiatrists, physiotherapists and speech therapists. This means an extra 3,750 places on top of those that the government has planned.
• Reward low-paid nurses, midwives and other low-paid professionals by paying them an additional £1000 on average every year. We will also boost staff retention with additional funds available for pay increases for other NHS staff.
• Provide an extra 11000 hospital beds over five years. This means providing 4,000 extra beds on top of the government’s current plans, to cut waiting times.
• Inject an extra £500 million over five years into dental services. The money will be used to guarantee access for everyone to an NHS dentist. We will do so by rewarding dentists' for working in the NHS and offering them incentives to invest in new equipment and buildings, to encourage practitioners to return to NHS work. The British Dental Association estimates that this would bring back the equivalent of 1000 full-time dentists to NHS work.
• Double the government’s commitment to invest in the latest scanning and diagnostic equipment. We will provide advanced equipment in hospitals across the country, funded by cutting unnecessary bureaucracy within the NHS.
• Restore free NHS dental check-ups for all to improve oral health and prevent disease.
• Provide free eye checks for all to ensure that problems are spotted earlier, improving sight and preventing permanent blindness in some cases.
• Pay for all long-term personal care costs. The Royal Commission on Long Term Care, set up by Labour, recommended that these costs should be met by the state, so people are not forced to sell there home to pay for their care. The Westminster Government ignored this key finding, though Liberal Democrats in Scotland are using their influence in the Scottish Executive to implement it.
• Tackle the postcode lottery which means that some treatments are only available in some parts of the country. We will create a Pharmaceutical Agency to use the purchasing power of the NHS to drive down the price of established drugs and secure the more sophisticated medicines and technologies at affordable prices. The money saved would be used to end the postcode lottery and make advanced and expensive drugs more available within the NHS. Over time, we will use further savings to reduce and eventually scrap prescription charges for all.

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Freedom to Learn: Education

The Liberal Democrat Alternative Budget will provide an extra £3 billion per year for education. Our plans for this extra revenue include:

• Cut average class sizes to 25 for all 5 to 11 year olds. We will do this by establishing a maximum average class size of 25 in each local authority’s primary schools.
• Fund 5000 additional secondary teacher places. This will bring pupil:teacher ratios at least back to 1997 levels and start to improve on them. We will put particular emphasis on recruiting teachers in shortage subjects.
• Guarantee a classroom assistant for every 25 pupils in the 5-7 age bracket (Key Stage 1) to improve the ratio of adults to children in infant school classrooms. We will provide 45,000 extra classroom assistants, including 25,000 for 5-7 year olds, compared to the government’s plan to spread 20,000 across all age groups.
• Introduce paid preparation hours for primary teachers. By funding extra posts, we will be able to allow all primary teachers two paid hours a week to prepare and plan lessons.
• Pay trainee teachers a full training salary replacing the current training grants to improve teacher recruitment.
• Increase funding for books and equipment in schools over and above existing spending levels.
• Increase funds available to school libraries by an average of £1250 per primary school and £4250 per secondary school every year.
• Increase funding for ICT and science equipment and purchase and maintenance, and ICT training for teachers within schools, over and above existing spending plans.
• Fund 1000 early years specialists to work with early years development partnerships to ensure that children receive proper stimulus in the early years either at nursery school, pre-school playgroups or at home.
• Abolish university tuition fees throughout the United Kingdom. Liberal Democrats have already achieved this in Scotland by making it a priority issue and have set abolition in train in Wales.
• Give every adult an entitlement to publicly funded tuition. We will provide the funding to allow any adult the chance to acquire a Level 2 qualification (the equivalent of 5 GCSEs at grades A to C, an intermediate GNVQ or a Foundation Modern Apprenticeship). We will fund those aged 16 to 24 up to Level 3 (equivalent to 2 A-Levels at grades A to E, an Advanced GNVQ or an Advanced Modern Apprenticeship).
• Fund a 'Schools 2010' programme to tackle the backlog of school building repairs. The programme would include environmental assessment of buildings and would promote the use of better insulation, double-glazing and solar panels where possible.

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Freedom from Poverty: Pensions & Benefits

The Liberal Democrat Alternative Budget will enable us to:

• Increase the state pension by £5 a week for each single pensioner, £10 for the over 75s and £15 for the over 80s (on top of the April 2001 increases). Couples will receive £8, £18 and £28 respectively. We will give the most to older pensioners because they are amongst the poorest and neediest people in the country. For the past thirty years, they have only received a derisory 25p extra a week at 80 over and above the basic pension. We will also reward pensioners who have saved throughout their lives by scrapping the rules which deny help to people with small savings above £12,000.
• Fund our big increases in pensions by setting a new top tax rate of 50p on income over £100,000 a year and using part of the revenue to pay for our pensions policy. To put this measure into perspective, for most of the Thatcher years, the top rate was 60p starting on substantially lower incomes.
• Alleviate child poverty by paying an additional £200 per year to all families with children who have been on income support for more than a year. Such children suffer from the poverty their parents find themselves in.

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Freedom from Crime: Law & Order

The Liberal Democrat Alternative Budget will enable us to:

• Fund the police for 6000 more police officers than March 2000 levels. We will fund 2000 recruits on top of the government’s plans to ensure there is real increase in police strength, not just replacing cuts under Labour and the Conservatives. We will also ensure that the police spend more time on front line policing and provide extra resources for pay and conditions to boost retention of police officers.
• Fund 2000 part time community officers by creating a new category of part time retained police officers. This would give the police more flexibility. Suitable members of the public and police officers near retirement wishing to continue in work will be recruited, and given proper training and equipped for the duties of a police constable.
• Establish a Community Safety Force to work with the police by co-ordinating the public safety work of traffic wardens, estate and neighbourhood wardens, park superintendents and other public officials who deal with nuisance crimes like littering, vandalism and graffiti. They will receive special training. This will free the police to concentrate on more serious offences.

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Freedom to Travel: Transport

The Liberal Democrat Alternative Budget will:

• Reward motorists who drive less-polluting vehicles by reducing car tax (Vehicle Excise Duty) on more environmentally friendly cars and motorcycles – abolishing it altogether for the greenest vehicles. We will fund this by increasing the amount of VED charged on the most polluting vehicles.
• Guarantee not to increase the tax per litre of fuel received by the government, in real terms, in the next Parliament. Our policies for improving public transport and encouraging less polluting vehicles means that we do not need to increase petrol taxes further in order to meet our environmental objectives.
• Introduce environmental incentives for bus operators. We will reform fuel duty rebates for bus operators so that these are tied more closely to those running more efficient vehicles, particularly those using alternative fuels.
• Extend free off-peak local travel on buses to all pensioners and people with disabilities. This would extend across the UK the scheme currently operating in London and those being developed in Wales. In addition we will introduce a scheme of half-fares at all times for under 19s in full-time education.
• Establish a Rural Transport Regeneration Fund to help improve public transport in rural areas.

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Freedom for Enterprise: Business

The Liberal Democrat Alternative Budget will:

• Cut business rates on small businesses by introducing a Business Rates Allowance, similar to personal tax allowances. This tax free allowance would be set at £1600. With larger businesses paying a little more to cover the cost of the scheme, smaller businesses will pay less.
• Invest in a knowledge-based economy through research. We will give priority to research on climate change and sustainability, and set up an Academy of British Invention. This will be funded by stopping the Export Credit Guarantee Department using taxpayers' money to subsidise arms exports.
• Reduce greenhouse gases. The Climate Change Levy is overcomplicated and bureaucratic, and discriminates against manufacturing industry. We will gradually replace it with a carbon tax which falls on energy use according to its carbon content. We will reinvest in more energy conservation and efficiency grants and introduce a properly monitored emissions trading scheme to allow businesses to cut greenhouse gas emissions in the most cost-effective way.

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Freedom of Expression: Culture & Sport

The Liberal Democrat Alternative Budget will enable us to:

• Give all pupils an entitlement to arts education throughout their school careers. We will recruit and train more specialist art teachers and ensure that all primary teachers are well trained in the arts. We will increase funds available to school libraries by an average of £1250 per primary school and £4250 per secondary school. We will restore funding for free instrumental tuition to at least 1990 levels, giving many more pupils the chance to learn an instrument once again.
• Provide free access to national and municipal museums. We also aim to increase significantly the acquisitions budgets of school and public libraries.

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Freedom for Communities: Rural Affairs

The Liberal Democrat Alternative Budget will enable us to:

• Protect greenfield sites and encourage urban regeneration through partnership between local authorities and private enterprise, and our reform of the VAT system. In addition to an immediate cut of business rates through a Business Rate Allowance, we will also allow local councils to replace the Uniform Business Rate with a system based on the value of each site (Site Value Rating). This would encourage rather than penalise those who develop town and city-centre sites and renovate older properties. We will also clean up brownfield and damaged wildlife sites using revenue from a greenfield development levy set by local authorities.
• Protect village pubs and local breweries by extending the 50% mandatory rate relief currently enjoyed by some village shops and post offices to sole village pubs and encourage wider use of local authority powers to grant additional discretionary relief for services and businesses.

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Freedom Abroad: Overseas Aid

The Liberal Democrat Alternative Budget will enable us to:

• Take a substantial step towards honouring the UK's commitment to meet the UN target of increasing overseas aid to 0.7%, as part of a programme to meet it over the next ten years. We support the moves already made by the British Government to reduce the debts of the world's poorest countries. But Britain could take the lead in favour of more rapid action on debt relief by bodies such as the International Monetary Fund and the World Bank. Their Poverty Reduction Strategy Programmes should attach at least as much importance to governments taking action to tackle poverty as to liberalising their economies.

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Appendix 1:

Notes on Current Taxation and Spending

1. Taxation

Under any reasonable definition taxation has risen. While much of this rise is cyclical some is due to implementation of duty escalators. On the government’s own figures in 2000 taxes will be 40% of GDP compared to 38% in 1997. However, this has been to eliminate the Conservative deficit, not to raise spending.

2. Borrowing

So borrowing on any definition has dramatically dropped compared to 1997 – a deficit on the current budget in 1997 has turned into a sustained surplus – averaging more than 1% of GDP.

3. Spending

The dramatic fall in borrowing has only been achieved by an unprecedented squeeze on spending, as well as increased taxes. Under Labour spending has undershot the spending plans that Ken Clarke called ‘eye wateringly tight’. Spending as a proportion of national income has dropped so much that:

• Spending as % of GDP on health will have been 5.4% compared to 5.5% under Major
• Spending as % of GDP on education will have been 4.6% compared to 5.0% under Major
• Spending as % of GDP on pensioners will have been 5.2% compared to 5.4% under Major
• Total managed spending excluding debt interest and social security (Blair’s ‘costs of failure’) fell by 0.9% of GDP

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Appendix 2:

Summary of Main Tax and Spending Changes in the Alternative Budget

It is impossible before the Budget to be certain about the resources now available to the Chancellor. However, it is expected he may have substantial funds available. If so, in addition to the plans outlined above, we could begin to implement our long-term aim of cutting the tax burden on those below average earnings by cutting the 10p rate to zero. For example: Estimated size of Chancellor’s Surplus: £3-4b (Institute for Fiscal Studies, Jan. 2001)

Cost of cutting 10p tax rate to zero: £4b (Tax Ready Reckoner, HM Treasury, Nov. 2000)

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