Nick Clegg: Britain needs tax cuts – not just a bank bailout

Innovation must be harnessed, not stifled, if we are to beat the recession

Yesterday's rescue of Britain's banks is arguably the most ambitious act of economic intervention by a post-war government. The magnitude of the rescue package is staggering: the £50 billion of capital plus guarantees of £250 billion equate to more than 20 per cent of UK gross domestic product flowing into banks which seem to soak it up like blotting paper.

The Government action, pulled together early on Wednesday morning by a legion of exhausted officials, was unprecedented in scale. But it was necessary.

These are extraordinary times. Dramatic, even heavy-handed, action is right. It is right to go far beyond what I, as a liberal politician, would dream of proposing in the ordinary course of events. This is a once-in-a-lifetime crisis. It needs once-in-a-lifetime action.

Does that mean the era of Big Government is here to stay? Do uncertain times, as many people on the left assume, require the strong arm of the central state to intervene? Listening to the debates at the Labour Party conference, it was obvious that there are plenty of people in the Labour Party who seem to take pleasure in using this crisis to roll forward the frontiers of the state. Such overreaction is wrong and dangerous.

State action has also left the Conservative Party confused. Their ideological hostility to such intervention has produced slow, ill-considered and contradictory reactions. One day David Cameron defends the freewheeling City of London culture, the next he rants and rails at City bonuses. Such flip-flopping is the inevitable consequence of a lazy view of society which assumes that all problems can be tackled by laissez-faire conservatism and Victorian-style philanthropy.

The truth is that Britain needs a government which intervenes heavily when necessary, but leaves us alone when it can. Innovation must be harnessed, not stifled, if we are to beat the recession. The United States president Franklin Roosevelt, when confronted with the Great Depression, promised "a policy of bold, persistent experimentation".

State intervention is needed in some areas. We need immediate action to stop unjustified repossessions of homes and business assets. Propped up by taxpayers' money, the banks must realise that their obligations have changed. They must act in the public interest as well as their own, and it is right for the Government to intervene to ensure that happens.

But, outside the financial markets, British families still need the excesses of central government to be reined in. As every family tightens its belt, government must too. Now is the time for tax cuts for people and families on low and middle incomes, to help them pay their bills and mortgages.

Liberal Democrats are committed to lowering taxes for those who need help while raising them for the rich by closing the loopholes that benefit the wealthy. This is what families want and need: a simple, fair tax system that cripples no one. Some say our plans are no longer possible given the crisis. They are wrong – tax cuts are not just possible, they are vital.

During the 1980s recession, the chancellor, Geoffrey Howe, raised taxes and cut spending. Many imagine that such an approach is needed today, but times have changed and it would be madness to raise taxes now. In the short term, we have no choice but to run a deficit, and Liberal Democrat tax cuts will not change that. Tax cuts are affordable without additional borrowing if we trim spending and raise taxes for the wealthiest, as we propose. If we comply with the current fiscal rules over the next couple of years, we would have to decimate public spending or raise taxes to painful, punitive rates that would do far more harm than good.

In the 1930s, John Maynard Keynes advocated spending to pump-prime the economy, financed through unprecedented levels of borrowing. In the short term, the deficit was less important than helping people to make it through, he argued.

Today, taxation and spending are far higher than Keynes could ever have dreamt, so extra spending is not appropriate. But I share Keynes's reaction to the economists who believed that year-by-year budgets had to balance, irrespective of the pain it caused.

Our focus must be to get ourselves out of recession. Only growth will balance the budget in the long term.

Poor families need cash right now. Winter is closing in, and people will have to choose between heating and eating. They need money in their pockets, right now. The banks have had their rescue: it's time for families to get theirs.

The writer is the Leader of the Liberal Democrats