Lib Dems offer two-way pledge on tax

The Liberal Democrats have fired the opening shot of a potentially critical local election battle by announcing they would cut council tax by £100 a taxpayer but also support Labour's impending increase in national insurance rates to fund an improved health service.

The party has also challenged Labour from the left by proposing a redistributive income tax of 50p in the pound for anyone earning £100,000 or more.

The £4.5bn raised annually would be used to scrap tuition fees and plans to introduce top-up fees in higher education, as well as fund the council tax cut.

The Liberal Democrats see the local elections in May as a key test of their credibility, following speculation that they could replace the Tories as the official party of opposition this decade.

Hostility to big council tax rises could be a key feature in the local election campaign. Labour faces the danger of being squeezed from the left by opponents of the Iraqi war and from the right by opponents of the NI rise.

In the party's alternative budget submission yesterday, the Lib Dem Treasury spokesman, Matthew Taylor, sought to appeal to the left by backing a new top income tax band and looked to the right by promising his party would not raise income tax for the general taxpayer. He also promised a fundamental review of all government spending - likely, he said, to locate many billions of pounds in misused state spending.

He maintained that his alternative budget, based on fairness and spending wisely, was a big challenge to both Labour and the Tories.

The Lib Dems' 10-year-old pledge to raise income tax for education by 1p in the pound was formally buried when another party spokesman, David Laws, conceded that no space existed in the current economic climate to press the chancellor, Gordon Brown, to increase overall public spending any further.

He pointed out that state spending was already set to rise by £100bn in real terms from 1997 to 2005-6, when the current spending round comes to an end.

Mr Laws, who is halfway through his review of total government spending, predicted that he will be able to identify many billions of pounds of low-priority government spending. But he promised the Lib Dems would not follow the Tories into making arbitrary promises to cut overall government spending.

"At the last spending review, the government ... did what we wanted to do on spending," he argued.

He also acknowledged that "they tested the upper boundary of how fast you can increase government spending in real terms without a huge continuing increase in the tax burden that probably would not be politically acceptable".

His own spending review, he asserted, would not centre on cuts in paperclips and bogus savings.

He insisted that the Lib Dems were not looking at overall cuts in government planned spending in the current round. They would instead be looking at the implications of their commitment to greater decentralisation, the possibility of selling off state assets, and the reordering of government priorities, especially to the working poor.

One clear Lib Dem target for saving is likely to be the abolition, or at least radical reduction, of the Department of Trade and Industry.

The Lib Dems concede that their plan to block top-up tuition fees cannot be funded solely by the 50p new top rate tax, and say the party will also ask local students to consider staying at home for the first two years of higher education.

Mr Taylor claimed that the Tories had made themselves "incredible" by opposing the national insurance rise for the NHS without saying how they would improve health funding.

"The Tories are all over the place," he added.