JOHN HUMPHRYS: On Tuesday Gordon Brown will make his pre-budget statement, which will give us some idea of how he thinks the economy's been doing since his last budget and what he's planning for the next one. What most people want to know is whether he has a pile of money spare to spend on public services, to cut taxes, even perhaps to save for a rainy day. The Liberal Democrats have criticised the government's choices in the past. Their Treasury spokesman is Matthew Taylor. Mr Taylor, your lot would rather spend more money than cut taxes in a nutshell. MATTHEW TAYLOR: In a nutshell that's right. If you look at what's happening in the economy at the moment Gordon Brown's got a very successful track record, partly built on probably the most important decision he's taken to give the Bank of England independence which was something we argued for before the General Election with his opposition, but he did it afterwards and it's proved to have been extremely important as part of the measures of having a prudent and sensible approach to the economy. But he now, as a result of that has very large amounts of money built up in hand, taxpayers' money as a result indeed of tax increases and it's decision day. Over the next few months as he prepares for the budget the issue is does he use that for tax cuts and we know that he's got some he would like to make because he's spelt them out or does he use that for public services and I think anybody who has recently visited a school or hospital will see that that's where the money needs to be spent. HUMPHRYS: One of the cuts that he announced last week and will come into force in April, the penny off income tax, you would like to reverse that. TAYLOR: We would have not gone ahead with that last year because we believed the money needed to be put into education.. HUMPHRYS: ..and this year, next year. TAYLOR: Well what it looks like he's going to announce on Tuesday and of course I'm not privy to the figures in detail but I do know what the trend has been, is that the economy has been growing much faster than he predicted and as a result he's got much more revenue and therefore he has got money to spend. Now we've never been in favour of putting a penny on income tax education for the sake of it, we've been in favour of proper nursery education for three and four year olds, we've been in favour of reducing class sizes for all children. Now these things cost money and we've said that if there is no other way of funding it we would put a penny on income tax. If the money is there then he may not need to do that. I suspect that that is the case but what he must do is make that extra spending available because if he doesn't what parents will see is class sizes continuing to climb over the age of seven. After all, people who voted for the government two years ago and have a six year old in school, voted to get class sizes down, they've now got an eight year old and find that the class size is higher than it has ever been before. HUMPHRYS: So are you still broadly in favour of that extra penny on income tax for education? TAYLOR: Let me give you an idea of where I am coming from as Treasury spokesman for the Liberal Democrats. I believe that the most important single investment that could be made is in children's education. If you don't make it now those children can't go back and get it later, they will have gone through the system, so we believe it needs to be made now, not at a future date and that means releasing the money for the improvements we believe need to be made. It's not a question of a penny on income tax for the sake of it, it's about those improvements, for example in class sizes, for example in books and equipment, for example in better training opportunities for sixteen to eighteen year olds. So that we have a more successful economy, they have a more successful life, they can earn more and that of course is a virtuous cycle in the long run. Now, if we can do that without a penny on income tax of course we will do it without increasing income tax, we're not a party that likes increasing tax but the guarantee that you have with us is because we are prepared to spell out that we would increase taxes if that's what it takes to deliver these improvements, that they will happen. Whereas Labour, because they ruled that out we see naturally two years of cuts in schools and hospitals, growing waiting lists, growing class sizes. HUMPHRYS: So in that event you would end up two pence in the pound higher in income tax, higher than the Labour Party and indeed the opposition because they want to keep the penny as well, because you'd have cut off the penny. I mean you would not have cut off the penny that Gordon Brown wants to cut off and you would add on a penny. So you really don't mind being seen as the party of higher income tax, that's what it comes down to, isn't it. TAYLOR: No, I think you've misunderstood me. HUMPHRYS: I understand you say it might not be necessary but you would be perfectly prepared to do it. TAYLOR: We would be prepared to do it and the cost of that is around two billion pounds and therefore that's the equivalent of one penny so it is only one penny. HUMPHRYS: Yes but I was talking about the other penny that you would not cut off the whole.. TAYLOR: Well if that hadn't happened, then that money would already be going into schools. Indeed, when the government come in... HUMPHRYS: ...it is going to happen, that's the point. TAYLOR: No, what he's announced is that there will be an income tax cut but that money isn't going into schools, that's the difference. We would have not cut the tax and therefore had the money available. It looks like this year the money will be available anyway because the economy is growing faster, so we wouldn't need to make that move. But we will see on Tuesday the detail of that. But the point is that the fundamental difference between ourselves and the Labour Party on these issues of investment and education which both of us agree is vitally important, is that for Labour it comes: 'well one day maybe' with us it's guaranteed even if that means a tax increase. When we first introduced that policy we were told it was hugely unpopular and that's why only the Liberal Democrats can argue for it. Then it turned out to be popular and we're told that's the only reason the Liberal Democrats could argue for it. In fact, the reason we argue for it is so that people know what they are going to get. HUMPHRYS: But every time you produce an alternative budget, you not only add to the spending but you cut revenue because of changes in the tax system. Last time it's calculated it would have been twenty-nine billion pounds last time around. Now, that's actually rather irresponsible isn't it? TAYLOR: No, that's not right. What we have argued is - and these are choices the Chancellor can make. First of all we argued for exactly the kind of prudent economic approach that Labour have adopted. They didn't argue that in opposition but they adopted it in practice. The golden rule on budgets, the making sure that things are in balance on spending, that you only borrow to invest. We argued that before they did. The principle of an independent Bank of England so that interest rates are not manipulated by politicians. If you do that, you are going to get sensible steady economic growth over the longer run and that's what we're starting to see. But alongside that we've also spelt out how we would want to spend money in each budget. Of course, every party has long term aims on what they want to achieve but we spelt out very clearly what we would spend money on the short term and it wasn't twenty-nine billion. What we did say is that we wanted to take people on the first part of their incomes out of paying tax and raise tax allowances steadily over time and we would have started that process, taking two and a half million people out of tax by using the money that Gordon Brown wants to put into a ten p tax rate. HUMPHRYS: And you also want to increase taxes - tax revenue - by introducing environmental taxes. Now they have - and it's been proven time and time are terribly unpopular with the voters. TAYLOR: Well I've moved into this role from being Environment spokesman and was heavily involved in constructing our policies there and we have a golden rule on environment taxes which is that when you introduce them you use them to cut other taxes. So that they are not about increasing tax burden, they are about shifting it from things that we want which we tax very heavily at the moment like jobs to things that we don't want like pollution and that's where both the Conservative Party and the Labour Party have got it so wrong. We saw with the Conservative Party VAT on fuel and then the petrol price increases, Labour the petrol price increases and now other taxes that they've introduced under the banner of environment. The Labour Party and Conservatives both using them as back door ways of increasing the tax burden overall so people paying their petrol don't see anything in return. There's no extra investment in transport, they haven't had a cut in tax, the Chancellor has simply pocketed it and that's undoubtedly unpopular and will destroy the case for environmental taxes. HUMPHRYS: ` The case for environmental taxes, yes the problem with them is, if you have a list of them as long as you have, they might or might not help the environment, but people will certainly see them a whole litany of new taxes and they will say, yes, this is the problem with the Liberal Democrats, they want to tax us. TAYLOR: Let me give you two clear-cut examples of the difference between us and the Conservative and Labour parties on this. Petrol price increases introduced by the Tories, followed through by Labour, people getting nothing back in return. We would use the petrol price increase to abolish the annual car tax, the Vehicle Excise Duty on the great majority of cars that don't pollute very much, and which people need to own to get about. HUMPHRYS: I thought you were going to use that to plug another loophole. You can't spend the money twice which you're now doing. TAYLOR: No. That is exactly what we'd use the petrol price increase to be spent on. There isn't anything else that we want to spend it on. We also believe that petrol price increases are not very well targeted for environmental improvement and that much better as soon as it can be introduced are congestion charges, targeting the towns and cities where there are actually real congestion problems. And that money, that money, we would use for improvements in public transport. So we're not double spending but we're very clear on what we would use... HUMPHRYS: Right. But that money has already been spent and I thought you were going to use some of the extra money that you raise to plug the holes that were caused by the way in which you were changing the tax system. TAYLOR: No, the money hasn't been spent. In March if the Chancellor doesn't change the system he will be putting another increase on petrol. He will simply pocket that on present plans, indeed it will add to the surplus that he's building up. We would use it to abolish the annual car tax, to make it easier to own a car and instead have people pay as they go, and if they get a more polluting car then obviously they will pay through their petrol more than others, but most people would make a saving in the process. Let me give you another example on environment taxes, because it's important that this is understood. HUMPHRYS: Make it a short one. TAYLOR: On carbon tax, that's the taxes that business will be paying, the Government is putting in a huge block sum that will cost industry very hard. We argue for targeted carbon tax that will only be on the polluting forms of energy, and it would be used gradually, very gradually introduced, and gradually used to cut other taxes. HUMPHRYS: Matthew Taylor, must end it there. Thank you very much indeed.