Vince Cable: There will be more pain, but a stable recovery can emerge from this crisis

This morning's GDP figures are expected to show that the UK economy has grown for the first time in nearly two years, which everyone should welcome. But now we face tricky but important questions around recovery and how quickly we set about rectifying the hole in the budget that the credit crunch has left.

For the Liberal Democrats, bringing stability back to the public

finances is the first pillar of our economic policy. For this reason, I have set out five objective economic tests to determine when and how quickly the big budget correction should be attempted:

n The rate of growth;

n The level of unemployment;

n Credit conditions;

n The extent of spare capacity (and therefore, inflation risk);

n And – crucially – the borrowing conditions in international markets.

We do not approach any difficult spending decisions with relish. We realise that we are dealing with staff who have a real sense of public service and with services which are valued.

What is needed is a calm and rational plan, a proactive rather than reactive approach, identifying the priority steps which need to be taken to reduce government spending.

There are fundamental changes that need to be made to how the British state operates – axing much of the command and control system overseeing local government and NHS administration, scrapping expensive Home Office projects like ID cards and some substantial reductions in defence procurement such as Trident.

We worry that the Tories – if elected with the support of one in four of the electorate – want to say as little as possible before the election, then agree rapid painful cuts behind closed doors, and then ram them down the public's throats. It won't work.

One reason it won't work is that public sector employees, and the public, will say: "Why should we pay for a crisis we didn't create? Why are we the scapegoats?" The public has to feel that the process is fair; that pain and rewards are fairly distributed; and that those who caused the crisis are being properly dealt with.

This leads me nicely to the banks. I don't need to rehearse the history of the banking crisis. A major disaster was thankfully averted. But the Government has rested on its laurels. There are several changes required and these constitute the second pillar in the Liberal Democrat economic programme.

The semi-nationalised banks have lurched from lending irresponsibly to lending on very restrictive terms even to good, solvent small and medium-sized British companies. I want to see UKFI, the Government's shareholding body, giving a much firmer steer to those banks to act in the wider national interest.

Eventually, these banks will have to be reprivatised and run fully independently of government but that may take some time and should only be done when we can achieve maximum value for the taxpayer. Now that President Obama has taken on the issue of breaking up the banks on his side of the Pond, it is time that we do the same in the UK.

A modern version of Glass Steagall – the 1933 US legislation that barred banks which took deposits from risky trading activities – is required, separating retail and investment banking. There is need, too, for more meaningful competition in business and mortgage lending.

There is consensus too that the bonus culture must be curbed by

severely restricting high-risk cash bonuses and all high-level remuneration should be fully transparent as it is at present only for directors of public companies.

What has to emerge from this crisis is a sustained recovery not an ephemeral or unstable one; not another bubble; not a boom which depends on the fickle fortunes of the banking sector.

And that is why the third pillar of our economic manifesto is to

underpin stable, sustainable growth by maintaining the operational independence of the Bank of England, investing in education and by supporting private institutional investment in Britain's infrastructure by creating an Infrastructure Bank.

The Liberal Democrats believe that the public will accept the need for cuts in spending if they understand the necessity for these measures and if there is a sense of fairness in the sharing of burdens.

That is why we suggest, as the fourth and final pillar of our strategy, a revenue neutral package of tax changes centring on tax cuts for the low and average paid, by raising the income tax threshold to 10,000.

This would lift four million people out of tax altogether and cut the average working age person's income tax bill by 700. It will be paid for by raising taxes on the wealthy by removing relief such as higher rate tax relief on pensions, closing the differential between earned income and CGT, an extra levy on high value property (more than 2m) and some "green taxation", on aviation.

A package of this kind would achieve tax cuts for the majority while contributing to a greater equality of wealth and income and a greater sense of social cohesion.

There are painful times ahead but the Liberal Democrats believe that the measures we have set out to support recovery will do much to reduce the pain. We understand the enormity of the challenge ahead and are ready for it.

Dr Vince Cable MP was born in York. He is the Liberal Democrats' Treasury spokesman.