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David Cameron took the side of savers hit by tumbling interest rates yesterday and promised to abolish tax on the savings income of all basic-rate taxpayers. He also promised to lift personal allowances for pensioners by £2,000 a year.
Pounded by Labour charges of offering a do-nothing approach to the crisis, the Tory leader said that he wanted to help the "innocent victims" of the recession.
Cameron also toughened his approach to public spending, by proposing for the first time that its growth in the financial year 2009-10 be cut from 3.4% to 2.6%, saving £5bn. Setting out a plan for Conservative government, he said spending on schools, health, defence and international development would be maintained at Labour's planned levels, meaning projected spending in other departments could grow only 1% in real terms, instead of the 4.1% planned by Labour. Cameron said he did not think 1% unreasonable.
But his move imposes tight constraints on departments such as the Home Office, Ministry of Justice, business department, and communities department. George Osborne, the shadow chancellor, pointed out that public spending would still be rising by £25bn under the Tory regime, as opposed to £30bn, leading Tory rightwingers to claim that Cameron was not doing enough to break with Labour spending or borrowing.
The chief secretary to the Treasury, Yvette Cooper, said it was "economic madness" to slow public spending - the Conservatives were isolated internationally, she claimed. Downing Street was last night pointing to reports that Germany is planning a £50bn fiscal stimulus.
But Cameron is increasingly bold in advocating tighter spending, and has already proposed a lower level than the government plan for 2010-11. The country, he said, was facing a "catastrophic legacy of debt and disrepair"; he sometimes wanted to shake Gordon Brown, he said, to get him to understand his errors.
Cameron put his proposals in the context of a wider claim about the need for an economy that is more balanced, and not so tilted towards housing, the public sector and financial services.
He published reports on creating green technology incubators, and buidling the world's first trading market for environmental companies. He also revealed a review into how to give every home ultra-fast broadband within a decade. Brown is proposing a green and digital infrastructure renewal programme this spring.
The Tory leader's move came ahead of Thursday's meeting of the Bank of England monetary policy committee, expected to cut interest rates to possibly 1%, the lowest since the Bank's formation in 1694. A cut from the current 2% would further damage the interests of savers when savings are at their lowest for 50 years.
Cameron said: "We need to make a really big change in Britain from an economy built on debt to an economy built on savings. A culture of thrift at the heart of government and a culture of saving at the heart of our economy - these changes will provide strong foundations for the new economy we plan to build."
Privately, the Tories accept that the cost, and therefore the impact, of abolishing tax on savings for basic-rate taxpayers - £2.6bn - may be too high, since it is based on estimates made at a time when interest rates were much higher.
The proposal to lift tax on savings income would, the Conservatives say, simplify the tax system, since banks would no longer have to withhold 20% of interest income at source, and people on low incomes who currently do not pay tax at 20% would no longer be forced to apply for their money back.
In practice, a third of savers already have their savings in tax-free Isas, and yesterday's initiative by the Tories may prompt Brown (planning a tour of English regions starting tomorrow) to raise the maximum amount of income that can be invested in an Isa tax-free, currently £7,200.
The Tories denied that helping savers would take money out of the economy. They argued that advisers to the Obama administration are suggesting that tax cuts are three times as effective at raising growth as spending increases.
More broadly, Cameron insisted he was optimistic that his policy package was winning converts: the government's 2.5% VAT cut in December had been "a criminal waste" of £12.5bn of taxpayers' money, saying the government might as well have burnt the cash.
Cameron also repeated his call for a government insurance scheme to back banks lending to customers and businesses. The Treasury is looking at a similar scheme, but the government will be determined to present any proposal as sharply different to the Conservatives' socialisation of credit.
Parties' policies
Labour plans
• Cut VAT by 2.5%at cost of £11bn to stimulate demand.
• Consider second round of help for banks following £50bn recapitalisation, but put the idea of more government cash for banks on the back burner.
• Create 100,000 jobs by advancing extra capital investment directed at green jobs and school building.
• Publish interim report on digital Britain.
• Encourage ailing firms to switch staff to part-time work and allow staff to train for remainder of time.
• Consider bringing forward extension of school leaving age.
• Allow mortgage holders in difficulty to have a two-year interest rate holiday.
• Consider help for savers in March budget.
Tory plans
• £50bn national loan guarantee scheme to help free up credit for business. Focused on short-term credit lines, overdrafts and trade credit - the lifelines all businesses need to keep afloat.
• £3bn tax breaks to reward companies who take on new staff.
• Small businesses to enjoy six-month VAT holiday.
• An environmental stockmarket, where green companies are listed and traded.
• No tax to be paid on savers' incomes for basic rate taxpayers. Help 5 million taxpaying pensioners by increasing personal allowances.
• Commission report on how UK households will have access to high-speed broadband internet within next 10 years.
- David Cameron
- Conservatives
- Economic policy
- Gordon Brown
- Tax and spending
- Credit crunch
- Small business
- Banking
- Recession
- Banks and building societies
- Savings
- Income tax
- Tax
- Public services policy
- Public finance
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