Nick Clegg: Tackling the poverty that Labour ignored

Every time budgets have been cut in the past, the poorest have suffered the most. This time, it's the richest who will pay the price

When George Osborne delivered his Budget speech last week in the House of Commons, every MP knew that the stakes could not be higher. This Budget will shape our politics, and the fortunes of millions of British families, for years to come. No wonder the mood among MPs was somber.

MPs from the coalition government were aware of the huge significance of the judgement we have made: that the acute market unrest in Europe, and the vast black hole in Britain's finances, threaten the basic stability of the British economy and so make radical action unavoidable.

We did not announce the Budget with any relish – no incoming government lightly risks widespread unpopularity so early on. But our basic assertion is sound.

Without a concerted attempt to bring sense to our public finances, interest rates will rise so tipping the economy into a double-dip recession, confidence will evaporate leading to higher job losses, and our children and grandchildren will be condemned to spending billions serving this generation's debts at the cost of investment in their own schools and hospitals.

It would have been a moral betrayal to have chosen the easy route, ducking the difficult decisions today at the cost of jobs and prosperity tomorrow. That is why the reaction of Labour MPs was so striking. After 13 years in government, they slipped into the worst form of opposition politics – in denial about their responsibility for the mess they created, in denial about the true state of the economy, in denial about the difficult choices we face.

Immersed in a desperately introverted leadership election, Labour has decided to talk to itself just when the country needs an Opposition big enough to face the facts. One Labour MP after another rose to their feet piously condemning the Budget. Each appeared to believe that the deficit can be tackled without controversy, that decisions can be delayed indefinitely, that the problem can somehow be wished away.

Meanwhile, the coalition government is trying to grapple with biggest challenge of all: how to balance the books but do so as fairly as possible. In the past, every time budgets have had to be cut, the poorest have suffered the most. This time, the richest are paying the most, not just in cash terms but as a proportion of their income. This is completely different from the budgets of the past; this was a coalition Budget.

Look at the proposals in detail and you will see how we have tried to get the balance right. First: we have reduced taxes on earnings for those on lower wages, by increasing the income tax threshold by a full £1,000. That has freed nearly 900,000 low earners from paying income tax altogether and put money back in the pay cheques of millions more. That is a vital first step to achieving the Liberal Democrat ambition that the first £10,000 you earn should be tax free. While Labour took money from the poorest and demanded they fill in forms to get some of it back, we have enabled people to keep more of the money they earn and make their own choices about how to spend it.

Second: we have increased taxes on unearned income by putting up the rate of capital gains tax for higher earners by a full 10 percentage points. No longer will a banker or a hedge fund manager be able to pay less tax on their capital gains than their cleaner does on their income, as they could under Labour.

Together these two tax changes are fundamentally liberal – redistributing unearned and accumulated wealth while encouraging work and enterprise, especially for those on the lowest incomes. They come, of course, together with an unpopular increase in VAT. But when it comes to a choice between taxing what people choose to buy and taxing work, it is liberal to come down on the side of consumption rather than payroll taxes. It has been part of a long liberal tradition, from John Stuart Mill to Jo Grimond, to encourage work and tax unearned wealth and consumption instead.

On top of our tax measures, this Budget protected pensioners and children. It was a Liberal government that first brought in a state pension: we have lived up to our past by guaranteeing decent growth in the state pension. The Budget adopts our manifesto commitment to a "triple lock", so pensions rise every year in line with earnings, inflation, or 2.5 per cent, whichever is higher. Never again will pensioners be allowed to fall behind.

As for children, this government understands that the young should not be penalised for the economic mistakes of the past. That's why we've increased tax credits for the poorest families to help ensure children of all backgrounds get a fair start in life. And we remain committed to a new pupil premium – additional funding targeted at the most disadvantaged pupils to ensure they get the head start they need at school.

Decisions on benefits have been controversial, but I believe they meet the same test of fairness. It is not fair, progressive or liberal to make people better off living on handouts than they would be earning a living. Tony Blair promised the most deprived in our society a "hand up, not a hand out", but after 13 years of Labour rule there are more people on benefits than ever before. The coalition government will succeed where Labour failed, and offer people the opportunities they need.

The Budget was not easy, of course. Everyone will feel some of the pain of the difficult decisions we took in order to bring sanity back to the public finances. But we have made the best choices available to us in the circumstances, offering protection to those who need it and ensuring those with the broadest shoulders take the greatest strain.

The arguments about this Budget will rightly rage for a long time to come. But a basic difference between the political parties has already opened up: between one party which was heavily responsible for the mess in the first place, now living in denial about the consequences; and two parties coming together in an attempt to set things straight for the good of all.