The party yesterday proposed substantial tax increases targeted at middle class home owners and second pension holders. Stamp duty would be increased on house sales, and mortgage tax relief would be scrapped under the Liberal Democrat plans over the next five years. Compulsory second pension contributions would also be used to impose a tight economic squeeze on the middle classes.
The Liberal Democrat conference in Brighton endorsed plans to reduce the tax burden of the poorest 10 per cent of people by increasing taxes on the richest 10 per cent, an amendment backed by Simon Hughes. But raising taxes to pay for Britain to enter the euro could provide explosive ammunition for the Tories who will fight the next election on a commitment to keep the pound.
Treasury sources were furious at the claims that taxes would have to rise, which they strongly denied, insisting that Britain could reduce the level of interest by other means, before entry took place. "I don't know whether they have a real understanding of economics. They clearly haven't. One of the reasons we haven't entered the euro is precisely because our economic cycle is not in line with interest rates of the `ins'," said a source close to the Chancellor.
The Liberal Democrats, who are committed to Britain's entry to the euro, said Bank of England officials had disclosed in private talks this year they had been expecting a tax raising package, if the Government went ahead with entry to the euro.
"When we went to the Bank earlier this year, they said they had been expecting any government serious about joining the euro to do it," said a key adviser to the Liberal Democrat treasury spokesman, Malcolm Bruce.
The source said taxes will have to be raised to bring down interest rates by more than 50 per cent from 7.5 per cent to around 3.5 per cent to achieve convergence on rates in the euro among the `ins', the countries who are joining the first wave.
Attacking tax breaks for the rich given by the Government, Mr Bruce said: "Preparing for the single currency will require aligning British interest rates more closely with Europe, another reason why use of fiscal policy is essential. In a single currency area, there will be a single interest rate. This will make even more of a nonsense of his refusal to use taxes or savings to stabilise the economy.''
The Liberal Democrat leadership was rebuffed when party members overwhelmingly backed calls for the National Minimum Wage to apply to all workers aged 16 and over. Delegates ignored a plea by the treasury team to give the Low Pay Commission powers to institute a lower "development rate" if evidence suggested the full rate would damage job prospects for young people. Ed Davey, the party's economics spokesman, warned that rigid rules for the labour market might result in a growth in youth unemployment. "We cannot ignore the practical real life effects. With the withering impact of unemployment on the young, we must be cautious."
But Lembit Opik, the party's spokesman on Wales, said that the exclusion of young people was against the party's principles. "Equal work should get equal pay ... it is as simple as that. I accept there could be an impact on unemployment and we would have to be cautious. But that does not overcome the fundamental matter of principle and conviction that we are debating here."
Simon Eddy, 14, a member from Truro and St Austell, condemned the proposals as a "policy of poverty pay". He said to rapturous applause: "I don't eat less than the 18-year-old. When I am 16, will my food or heating cost less? Is there a discount card for 16-year-olds I can apply for? No one should be forced into work for money they can barely live on. The principle is simple: equal pay for equal work!"
The leadership is braced for a conference defeat today over its plan to shift power over schools to parents from councillors, many of whom are Liberal Democrats.
Letters, Review, page 2