Cable's message to Darling: time to get serious on the cuts

The Liberal Democrats' deputy leader dismisses government plans to reduce spending – so how does he propose to slash £80bn a year, asks Sean O'Grady

Serious is the word that sums up Vince Cable. He has got a sense of humour, as we know, but when he's talking economics he cannot help but be a touch austere, dour even. Mr Cable is very serious, for example, about finding yet more economies in public spending. One new suggestion he makes is that the age qualification for the winter fuel allowance could be raised to 65, though payments would be extended to the seriously ill and disabled; this would yield a net saving of £250m. Another idea, in keeping with Liberal values, is to abandon the next generation of biometric passports and the ID card scheme.

Longer term still, he wants a "fundamental review of public sector pensions", which are "not sustainable at the top end". Retiring senior local government officials and police officers on half pay would not be justified, he says, but MPs' generous pensions are "a scandal".

The NHS would not be "ring fenced" as that would risk efficient spending in, say, defence being cut to protect inefficient spending on health. Mr Cable is already planning £13bn a year of cuts beyond the Government's existing plans of around £50bn – as well as looking for £2bn from tax rises. Yet even that falls short of his ultimate ambition to save £80bn a year, fixing a structural budget deficit he puts at 6.5 per cent of GDP. Mr Cable admits that he is yet to find the last £14bn of cuts he needs to make his plans add up. He wants to eliminate the structural deficit in eight years at most – faster if the economy allows. Even in boom times it would be an ambitious project.

Maybe he mentioned these plans during his much-published chats with the permanent secretary at the Treasury, Sir Nick Macpherson, with whom he got along "perfectly amicably": "It wasn't the third degree". Although the talks sparked yet another round of speculation on Cable-for-Chancellor and coalition government, he says: "There have been no backstage dealings ... We're not in negotiating mode."

Yet the Liberal Democrats' Deputy Leader also confirms that if the party were to be involved in a post-election "arrangement", the party's leadership would be bound by "protocols" set down by the 1998 Liberal Democrat conference. These are cumbersome: the "triple lock" requires a two-thirds majority in favour of any deal among Liberal Democrat MPs and the federal executive; without that, the decision would go to a Special Conference or a ballot of members. All that might only add to the febrile atmosphere of crisis and speculation that would dominate a hung parliament.

For now, Mr Cable is getting serious about the banks. Put crudely, he wants to dock the pay of the bosses at the big taxpayer-owned institutions – Royal Bank of Scotland and Lloyds Banking Group – if they do not meet "strategic targets" on lending. Referring slightly menacingly to the chief executive of RBS, Stephen Hester, he says: "You can't lock Mr Hester up in the Tower of London if he doesn't meet them." But he adds: "You have to have some penalty system. It could be reflected in their remuneration. The Government is, after all, the main shareholder". Barclays and others are in "a slightly different position" because they are not publicly owned, but he wants their capital and liquidity requirements to be geared to encourage lending.

The Government's new scheme to make the banks target gross lending – abandoning net targets that took account of businesses repaying debt – is dismissed with a grimace.

"It's a cop out, and in any case the Government hasn't even enforced the existing lending targets, which we were told would be 'legally binding'. It's a policy failure". Mr Cable says he sympathises with the bankers who are "genuinely perplexed" about the mixed signals coming from the authorities; ministers urge them to lend more; regulators want them to preserve capital; the Bank of England says it will withdraw £200bn in cheap funding for lending via the Special Liquidity Scheme.

So will the banks and hedge funds flee Britain? "There was a little snippet I read the other day that the number of British people applying to live in Switzerland was declining, that is in the financial service sector.

"There is a lot of bluffing going on. A lot of them are non-doms anyway ... I think what is more serious is companies moving abroad." He thinks the Tories' plan to reduce the corporation tax through reducing capital allowances would penalise manufacturing; but he has not yet found the answer to making UK corporation tax internationally competitive.

On the economy there is yet more seriousness. The slowdown in Europe is "one of the worrying negatives". A double-dip recession here is a "serious possibility" and the Government's forecasts for growth are "optimistic". These dangers, Mr Cable says, could limit the scope to reduce the budget deficit quickly. In this sense, Mr Cable leans more to the Treasury view than to the Conservatives. Mr Cable agrees with Gordon Brown that there is no case for more cuts this year, and that future fiscal tightening should be contingent on the state of the economy, along the lines suggested by Mervyn King, the Governor of the Bank of England. But Mr Cable does want to see more of the £80bn in fiscal tightening sourced through spending cuts than the Government does – just hiking taxes is another "cop out". Despite the potential takings, he is "not advocating" an increase in VAT, for example. The pledge to take those on less than £10,000 out of income tax is to be paid for by the "mansion tax" on £2m-plus homes and the abolition of higher-rate tax relief on private pension contributions. No large net increase in taxation is planned.

There is also, say Mr Cable and Nick Clegg, a "missing ingredient" in the Conservative and Labour plans – the public. The Liberal Democrats admire the recent Canadian experiment encouraging people who work in and use public services to suggest economies and set priorities. Mr Cable says: "We've discussed this with the Canadians. What they did, having agreed a framework, was to sell it around the country at town hall meetings, trying to explain what is going on and get alternative ideas."

Today's Budget is Mr Cable's next challenge; then there is the Darling-Osborne-Cable televised debate next Monday, in which Mr Cable, oddly for a Liberal Democrat, enters the studio with the most to lose. Then there is the campaign; and then... Number 11? Power? The first Liberal Chancellor since Reginald McKenna in 1916? It's all a question of whether the voters also want to get serious.

Vince's £13bn of cuts starts here

* £400 cap on pay rises for all public sector workers for at least two years: will raise £3.5bn

* End to Government payments into child trust funds: will raise £600m

* Reduction of tax credits for high earners: will raise £1.3bn

* Increase in qualifying age for winter fuel payments: will raise £200m

* Abolition of ID card scheme: will raise £700m

* Cancellation of Eurofighter Tranche 3b: will raise £500m

* Scaling back of HomeBuy schemes: will raise £200m

* Cut-backs on regulation of local authorities: will raise £900m

* Cuts to regional development agencies: will raise £600m

* Prison reforms: will raise £700m

Today's Budget: Racing certainties and rank outsiders

1-2 (odds-on)

Tax avoidance

No surprise if the Chancellor tightens up still further on tax evasion. Targets will include offshore accounts, abuse of pension schemes, use of corporate vehicles to avoid stamp duty, more clarity on non-resident and non-dom status (the latter also politically mischievous). Accountants will have to be even more forthcoming about their wheezes.

Evens

Big rise in alcohol and tobacco duty

Usually taken as read, the pitiful plight of the British pub might persuade Mr Darling to ease off increasing the duty on beer.

2-1

Green incentives

No modern Budget is complete without some token measures to promote environment-friendly jobs.

5-2

Trim borrowing forecasts

The approximate £10bn windfall from lower unemployment will be mostly used to reduce borrowing, which should help with Fridays headlines and demonstrate that the worst of the deficits are behind us.

3-1

Postpone rise in fuel duty

"Motorway man" is said to be key to the election, and petrol prices have risen sharply this year. An easy way to show that the Government is on the side of hard-working (motorised) families. Slightly contracts the green agenda.

4-1

A tax on the banks

Some sort of crowd-pleaser is inevitable; it is just a question of how it will be framed. At the front of the field is a tax related to the riskiness of a bank's business, and its size and "systemic risk". The money paid will go into the general public finance pot, rather than into some insurance fund for banks that fail in future.

10-1

Deep cuts to public spending

Mr Darling will want to provide more detail on his plans to cut spending – but not so much as to frighten the voters. Efficient savings will be highlighted once again.

15-1

Cancel rise in National Insurance contributions

Employers' organisations and the Opposition have condemned the planned rises in employers' NI contributions next year as a "tax on jobs"; a cancellation would be dramatic, but Mr Darling really needs the money.

20-1

Reduce growth forecasts

Most observers think them absurdly optimistic, but the Chancellor needs a strong bounce-back in growth to make his figures add up. But he needs to avoid outright ridicule.

25-1

Reduce threshold for 50p rate

Even a token reduction from £150,000 to, say, £125,000 would place the Tories firmly on the spot; will they reverse the move with "a tax cut for the rich"?

33-1

A pre-announced rise in VAT

Although almost every City economist expects the next government will be forced to raise the rate, and to announce the move in advance to give consumers a short-term incentive to spend, the Chancellor will be unwilling to admit that he is contemplating such a politically charged move.