Simon Szreter: The markets are holding us to ransom

We need tax honesty among the citizens and corporate executives of this country

In The Road to Serfdom Friedrich Hayek was clear that liberty is equally under threat from "the two great vested interests: organised capital and organised labour". Many leading Conservatives are proud of their role when Mrs Thatcher took on the over-mighty unions in the early 1980s. But 30 years on the enemy of our liberty is the other Hydra identified by Hayek.

There is no sign that the Coalition has the Thatcherite resolve necessary to reform the City. The Governor of the Bank of England, an honest spokesman for financial sanity, has clearly specified the crucial reform needed. Banks must have their two functions divided to return genuine risk to the investment bankers and genuine security to the world's credit institutions. Mixing the two has been a toxic experiment.

We form coalition governments in times of crisis. If there is a reason for the Liberal Democrats to join with the Conservatives, it can only be justified by the seriousness of the challenge we face. The deficit is not that challenge. It is the symptom of it. The threat to our nation's liberty is the vested interests of organised capital.

There is absolutely no disagreement that the reason for holes in the national finances of governments all across the world is that the gambling of the financial services sector has been allowed to get out of control. It must now be rectified as a matter of extreme urgency, before one country's citizens after another are plunged into serial penury by the predatory behaviour of an international financial system that is entirely undisciplined by risk.

Meanwhile the Coalition Government's two partners are spending their time on cuts to our public services. With cynical temerity these are presented as "radical reforms". The Alice in Wonderland circular logic evades the need to address the root problem of a dysfunctional financial services system. It goes like this: in order to maintain the confidence and vigour of the international financial market, the rest of us have to let them continue with business as usual, indulge them whenever they make a colossal mess, bail them out and then take cuts in our living standards and all the services that make our society civilised because otherwise – yes, you've guessed it – the financial markets will "lose confidence".

This is a form of holding us all to ransom, which is what the trade unions were accused of in the 1970s. That was the self-interested use of the power of labour to exert leverage on the rest of society. What we are seeing today is the self-interested use of the power of capital to exert the same kind of distortionary leverage.

There is a truly fair alternative way to reduce the deficit over the next five years. This is to institute with immediate effect a rigorous policy of tax honesty among the citizens and corporate executives of this country. The official estimate of the difference between tax actually collected and tax owed was a staggering £40bn per year in 2007-8. Closing just half of that gap would do it without job-destroying cuts. The major contributions will come from precisely the bonus-accumulating, wealth-holding and tax-evading and avoiding class who caused the problem. That is true "fairness", not the phony fairness of the Coalition's social security cuts.

The bullies in the Bankers Union won't be happy with this or the banking reform, so they will threaten to withdraw their labour and leave. That's a threat to strike. It's also a bluff. Some pathological misers will go. The rest know there's plenty of youngsters to take their places.

We need a Coalition Government prepared to challenge the over-powerful as Mrs Thatcher did, not wait like cowards for others to lead. The cause of liberty is something uniting the Coalition partners that will pay off electorally. Tripling student fees, cutting (in real terms) the NHS, and punitive social security reductions is electoral death. It is fiddling while Rome burns.

Simon Szreter is Professor of History and Public Policy, University of Cambridge