Page last updated at 12:20 GMT, Thursday, 17 July 2008 13:20 UK

Why Clegg changed tack on tax

By Iain Watson
BBC political correspondent

The Liberal Democrats used to say they were the only party that was honest about tax. That meant telling people that if they wanted better public services, they would have to pay for them.

Nick Clegg
Mr Clegg denies the move is about political positioning

An extra penny on the basic rate of tax for education. A 50p top rate on earnings above 100,000 to pay for scrapping tuition fees and free personal care for the elderly.

But was this honesty the best policy?

After the 2005 election the party's strategists wanted to shed their image as tax and spend liberals and took the view that there was no future positioning themselves to the left of Labour.

Unique selling point

The 50p top rate of tax was ditched by Nick Clegg's predecessor as Liberal Democrat leader, Sir Menzies Campbell - but not without strong opposition from some in his own ranks.

The party of high tax had, in the words of the Lib Dem spin doctors, become the party of "fair tax".

But now Nick Clegg wants to go further and gain a reputation as a tax cutter. He's no longer talking about simply shedding some specific taxes - but reducing the overall burden of tax.

The Conservatives have said the Lib Dems can promise tax cuts because the likelihood of their forming a government was so low they would never have to implement them

With Labour and the Conservatives suggesting that in the current far from favourable economic climate taxes may even have to go up, the Lib Dems are hoping to gain something of an unique selling point by suggesting they ought to go in the opposite direction.

But while the Lib Dems have set out their "vision" - their direction of travel - they have not yet set out the means to get there.

Nick Clegg set out a bit more of the detail and answered questions about his plans for the nation's finances in the rather appropriately named Bank restaurant in Westminster.

He said he would identify 20bn worth of cuts in government expenditure, part of which would be used to fund reductions in tax for the least well off.

No commitments

But he could not say what proportion of the 20bn - equivalent to about 3% of government expenditure - would go on tax cuts.

The plan in full would be set out before the next election, he said.

The Lib Dems have already identified some cuts in government programmes - for example, they would scrap ID cards, but they have already allocated those savings to pay for more police.

Senior Lib Dem sources I spoke to certainly saw potential political advantages in the change of tack from spenders to cutters.

They also intend to cut the number of MPs by 150 but that would not come anywhere near meeting their ambitious cut of 20bn in spending.

The best hints we had were a possible reduction in the number of government departments, and the curtailing of big defence projects - but as yet, no firm commitments.

So the suspicion was raised that this whole project was at least as much about political positioning as economic policy.

'Feeling the pinch'

The Conservatives have said the Lib Dems can promise tax cuts because the likelihood of their forming a government was so low they would never have to implement them.

At this launch Mr Clegg emphatically denied that his party was playing a positioning game.

But senior Lib Dem sources I spoke to certainly saw potential political advantages in the change of tack from spenders to cutters.

With the Conservatives forging ahead in the polls as many as a third of Lib Dem seats - especially those in southern England - could be vulnerable at the next election.

The Lib Dems' new approach would allow them to outflank the Conservatives on tax.

Sceptical voters

The Conservatives have committed themselves to meeting Labour's spending plans until 2011 if they form a government, so they have limited room for manoeuvre - a position many of their own activists dislike.

But the Lib Dems are also positioning themselves against Labour.

Party sources say they believe Labour voters feeling the pinch do not want taxes to rise any further and say they think advocating tax increases in the current climate would lead to them being "crucified".

But they also think they can outflank Labour on "fairness".

While the government focused on inheritance tax changes, every Lib Dem tax cut "would help struggling families, not millionaires".

Their proposed tax cuts would be "from the bottom up".

Mr Clegg himself said this morning: "How can it be fair that the poorest pay the highest proportion of their income in tax?"

But he has two problems in selling this policy. First, an electorate that is increasingly sceptical of politicians' promises would have to be convinced that - when the plans are eventually unveiled in full - the 20bn of savings can credibly be achieved.

Second, he has to convince some of his own MPs who previously backed a 50p top rate of tax that a reduction in the overall tax burden is the right policy for changing times, when people are struggling with high bills.

After his media launch, Mr Clegg headed off on Thursday afternoon for an "away day" with most of his parliamentary party.

Convincing them that his direction of travel is the right one will determine whether or not he returns unscathed.

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