Vince Cable: Labour's lost and the Tories don't get it

Cameron has had his fun, he will now have his feet held to the fire for the next year

The Budget has left behind an overwhelming sense of economic failure and foreboding that the financial crisis, which is still far from over, will create a prolonged and painful legacy of weak public finances. Politically the has been an open goal for the Tories. The Government has done too little, too late, to follow the Liberal Democrat lead on fair taxation and housing the homeless. They look as if they are acting out of electoral desperation, not real political conviction. So the Conservatives have had a wonderful opportunity to gloat.

More mature reflection may suggest to them, and the wider public, that there is little reason to gloat. The failure is much deeper: that of a model of economic growth which originated a quarter of a century ago in Thatcher's resurgent Britain which New Labour meekly adopted. And the more successful the Tories are in transforming this crisis into votes, the greater the likelihood of their inheriting a deep, systemic problem which they helped to create and which their modern PR skills are now hopelessly ill-equipped to solve.

The Falklands War was a key turning point in modern British history since it signalled the end of a long period of national demoralisation, relative decline and perceived failure. The basis of the subsequent economic recovery, which was brutally but only temporarily disrupted by the recession of the early 1990s, rested on several key elements: a liberalised, internationally competitive, financial services sector in the City; a property-owning democracy in which personal well-being and wealth were reflected in house prices; and a growth in personal consumer spending based on easy access to consumer finance and high personal indebtedness. The historic importance of Blair and Brown was to take and build on Thatcher's legacy enthusiastically and uncritically. And they milked it for all it was worth for 10 years before it failed.

Each of the three pillars of that model have now buckled. The banking sector has collapsed and the failure of the City tax revenues has contributed greatly to the crisis. The housing market has fallen by over 20 per cent and faces a much bigger correction. Frightened, over-indebted consumers will no longer spend. One of the more pathetic aspects of the is the despairing effort to recreate the glory days: the reliance on the failed and dangerous – but, now, taxpayer-guaranteed – mortgage-backed securities; the use of bribes to consumers to buy new, mainly foreign, cars; the mobilisation of a new army of overpaid investment bankers, this time to sell the mountain of government debt they did so much to build. Now the slickest bond salesman in the world would struggle to sell British IOUs over the next few years at a billion pounds a working day.

There is a wider global banking crisis and recession. But Britain is exceptionally exposed because of our extreme dependence on financial services, housing inflation and personal debt to sustain growth. Since the state has had to rescue the financial sector and sustain growth to protect employment (intervention about which the Conservatives have been deeply ambiguous), Britain's weakness shows up straightaway in our collapsing public finances. Where Britain now differs from other countries, particularly in the EU, is that while they are being hurt more in the short term by recession, Britain has a bigger, longer-lasting structural black hole. Even with Darling's optimistic growth forecasts, there is a massive deficit going forward.

The Conservatives claim that, if they win the election, they will be the victims of a "scorched-earth" policy. That's pretty rich since they lit the fire a generation ago. The issue for them now is how they (or for that matter, we) would, if elected, put out the fire.

The starting point has to be that the Government will be hamstrung by the present and projected deficit. There is a big choice between higher overall taxation or public spending discipline. Our sense is that there is no tolerance amongst low and modest taxpayers for higher taxes on their earnings. Millions of people below the equivalent of the minimum wage as well as those on average wages already pay 31 per cent marginal direct tax (income and NI). They now face an increase in National Insurance Contributions. The aim should be to cut their tax bill, not increase it. That is why we argue for lifting the income tax threshold to £10,000, lifting 4 million low-paid workers out of tax and worth £700 a year to taxpayers on average incomes – financed by removing the remaining tax loopholes and reliefs favouring the wealthy.

The focus should be on spending discipline. The lazy and cowardly ways of dealing with the problem are to pass it to local government to make the cuts; salami slicing, which always works to damage front-line services rather than the bureaucracy behind them; slashing useful public investment; or imposing service cuts dressed up as "efficiency". The Government is heading down this road already and the Conservatives are following: stealth cuts rather than stealth taxes. When pressed for specifics, George Osborne has mentioned ID cards – which we'd also scrap – but his next "cut" is reduced spending because the Tories "will reduce family breakdown". Let's be serious!

This is a time for grown-up debate. The deficit is too big and the public is too cynical of politicians to be taken in by vague, unspecific, promises. The only way forward is to identify, explicitly, areas of government activity which will have to be cut right back. My party has already identified several specific cuts – like the ID card scheme; the NHS IT project; "baby bonds"; refusing unlimited taxpayer subsidies for nuclear power. We believe that there now has to be a serious debate about how to scale back the reach of tax credits; ballooning public sector pension commitments, especially to "fat cats" (like MPs); gross military overstretch; the promise of access to universities for half of all young people; and much else.

Mr Cameron has had a few hours fun enjoying his party's revenge for the humiliation of Black Wednesday. But he will now have his feet held to the fire for the next year as we compete with him to replace a failed government on economic credibility and hard policy choices. Unless he tells us what the Tories would cut he is no more credible than the government front bench. Labour seem to have given up – so now it's up to the Liberal Democrats to take on the Tories and expose their subterfuge.

The writer is the Liberal Democrat Party's Treasury spokesman