Vince Cable: We have played fair with pensioners as we dig Britain out of its economic hole

We inherited an economy in which the share of the banking sector – the banking assets – had doubled in Labour’s period of government, to become the largest of any major economy. We also inherited an economy in which wealth became progressively more unequal throughout Labour’s period in office.

Being lectured now by Ed Balls on how to manage an economy is a little bit like being given a talk on seamanship by the captain of the Costa Concordia – another believer in light-touch steering.

I want to address the issue of unfairness and distribution. There are two allegations. One was that the policies have had a damaging effect on the so-called squeezed middle; the other was about the millionaires. Let me deal with each in turn. The squeezed middle has been squeezed a great deal less than the squeezed top. The major cash impact of the Budget was on low and middle-income families, as a result of lifting the threshold to over £9,200, with £220 for more than 20 million taxpayers.

That was right, not just because of the fairness involved, but because it gives a significant economic stimulus, and at the margin – the one million people being lifted out of tax – it is a major incentive to work. The policy also contrasts favourably with the strategy that the Labour Government adopted in office of using tax credits.

By increasing tax allowances in the way we have, we are giving people the freedom to choose how to spend their own money, not taking it from them and then giving it back to them, through a complex, means-tested system, with high marginal rates of withdrawal.

The shift from a system based on tax credits to one based on tax allowances obviously benefits the middle and low-income population as a whole. The impact on particular groups depends on a variety of things, including the minimum wage, which we have just uprated, and the complex interaction of tax and tax credits.

However, let me turn to the issue about pensioner income. In 2012-13, the effect of the increase in the basic state pension and the pension credit minimum income guarantee will be to transfer £1.7bn to pensioners. The impact of the changes on age-related allowances is £360m – one fifth of the additional funding going to pensioners as a consequence of this Budget. When we look at the pensioner population, we of course see big differences. There are five million pensioners who do not pay tax, many of whom are poor, and who are not, of course, affected by the changes at all.

There is a small group of people – frankly, my contemporaries – who have high retirement incomes and considerable asset wealth, and it is right that they should pay a bit more. There is a group in between of people who are not wealthy and do not have particularly high incomes, but who could be affected to a limited extent, as a result of inflation eroding the value of the allowances – inflation is currently estimated at 2.5 per cent.

Those people will benefit enormously from the increase in the basic pension.

Let us just remind ourselves what is happening. We have an increase of £5.30 in the basic state pension for a single person. On top of the increase last year, we are talking about a £10 increase in the basic state pension, as a result of the protections that this Government have introduced.

For many years, the pension steadily fell behind earnings as a result of de-linking, and, despite numerous promises, the previous government did absolutely nothing about the problem.

More and more pensioners were sucked into means-testing. This Government has corrected that problem. We have a triple lock system and, as a result of that, and of this Budget, the vast majority of pensioners on low and middle incomes will be considerably better off than they were before.

Let me turn to these millionaires. I agree with the Chancellor that the decision to cut the top rate of tax from 50p to 45p was economically the rational thing to do.

I share the emotional reaction of the many people who are disgusted to hear pampered financiers whinging about their taxes. On an emotional level, nobody can sympathise with that. However, we have to deal with the practical realities that were burned on my consciousness as a result of sitting in my place on the Opposition Benches for 13 years, exchanging views on the top rate of tax with successive Labour Ministers from Blair to Brown to Balls.

Year after year, they would tell the Liberal Democrats that it was economically stupid to raise the top rate of tax above 40 per cent. That was their message, year after year. Then, a few weeks before the end of their government – I think it was 57 days – they introduced the 50p rate in order to create a political dividing line.

That decision had nothing to do with economics. We are dealing with an extraordinarily dangerous and difficult situation. Quite apart from our own horrendous legacy, we have to contend with the threat of high oil prices and the currently stabilised but continuing crisis in the eurozone. As a consequence, our economic position is very difficult. The economy is not, of course, growing rapidly.

Ever since we came into office, I seem to recall Ed Balls predicting a double-dip recession, which has not happened. This year, growth is not spectacular, but it is higher than Germany’s and significantly better than the eurozone’s.

We acknowledge that we undoubtedly have major problems to deal with. Unemployment is far too high, but it is the same rate as in the United States, which is often regarded as providing a role model of how to deal with a crisis.

We recognise the seriousness of the problem; what we will be judged by is our effectiveness in digging this country out of the enormous economic hole that we inherited. We are on track to do it.

*Vince Cable MP is the Business Secretary. This is an edited version of his Commons speech on the Budget