Nick Clegg: Westminster is a 19th-century toy town, a fictional universe

Deputy prime minister Nick Clegg talks to Merryn Somerset Webb about federalism and shrinking Britain's debt mountain.


Nick Clegg: the coalition marks the death of the political duopoly

The last time I saw Nick Clegg, the deputy prime minister, I spent some time explaining to him that I thought cutting the tax incentives on pension contributions was a very bad idea.

He explained why he thought it was a very good idea. I clearly didn't win him over Steve Webb (the Liberal Democrat pensions minister) never misses a chance to say he would like to make the relief given on contributions a flat rate of 30%, regardless of anyone's marginal income tax rate.

I now half-agree: I'm fine with the rate being cut for high earners (the current system is just too expensive) but I'm not so keen on it being raised above the rate of income tax for those that only pay at 20% anyway (it would be a taxpayer-funded benefit too far).

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With this in mind, I went to meet Clegg again, this time at a mid-grade hotel not far from Edinburgh airport the kind you wouldn't expect the deputy prime minister of the country with the sixth-largest GDP in the world to have to stay at. On the plus side, it is warm and, in Scotland in the winter, that is all that matters. Really.

A lasting legacy?

The first thing I ask is what he thinks the lasting legacy of his coalition will be. For Clegg, it is the idea that "shared government space" is possible in the UK. This has been the first genuine coalition government in the UK in living memory.

As such it has "changed the rules of the political game", exploding the myth that government has to be a "game of pass-the-parcel from one party to the other".

This, alongside the rise of other, smaller parties, is all "part of the death knell of the duopoly" of Labour and the Tories. The two big parties will call the last few years a "blip", denigrating the Lib Dems and the rest as mere "grit in the oyster".

But their duopoly "will not return". Look at voting patterns and you will see that, for decades now, the share going to the two big parties has been falling. Multi-party politics is part of a long-term trend.

This might be tricky for journalists and voters to grasp for generations we have only had to bother with a "simple and crude" two-party system. But for Clegg, the "visceral reaction" to the Lib Dems in power has been in part a reaction to the disruption of familiar patterns. "Vested interests get vicious."

I wonder why he thinks the two-party system is over what has changed for the voters? It is partly about an end to class-based party tribalism, he says people don't automatically vote as their parents did anymore. That's "brilliant".

But there is a wider shift across "much of the democratic world". Politics used to be about left vs right, markets vs states, the rich vs the poor, capitalism vs communism, north vs south, and the like.

These traditional splits have "given way to a much more fluid politics of identity". History will see this as a "very transitional stage", with the things driving voter behaviour being more about religion, ethnicity and place.

That is "an unsurprising reaction" to a "profound sense of economic and social" uncertainty. In the face of globalisation, people aren't looking for global government: they are "holding on to what they know".

Why not scrap Westminster?

This is a subject I addressed at length in an interview with Bernard Connolly, author of The Rotten Heart of Europe, a few years ago.

At the time, Bernard and I agreed that this shift away from globalisation was dangerous stuff. Nick agrees. He reckons the danger can be defused with much more localism and federalism the centralised state has to be "disaggregated, broken up".

But we have to accept that we "can't change the reality" that there are many things in the modern world that can't be controlled, even by national governments. The government of the day has "only limited control" over global trade, international crime and climate change, for example.

So what we are inching towards now is a more federal UK, but also more things being done at a supra-national level the decisions we can't take on our own. His point? Localism can't empower people beyond a certain level anymore. "I can't think of an area of public policy now that is not impinged upon" by some kind of global decision-making.

Disappointing news, I say. But it leads to a thought: perhaps it isn't the European parliament we need to get rid of but the Westminster parliament? Clegg isn't sure that's a good idea. But he does agree that the "Westminster establishment is a real problem". Why? It is a "19th century toytown a fictional universe" in which people still seem to think that they have power, "because they have portentously pontificated on something, it will happen".

Large parts of the Conservative Party in particular "simply don't get" the way in which power has escaped "both upwards and downwards from Westminster", which makes today's debate between them and the Lib Dems "ideologically potent".

Now that we have started on the Tories, I figure we might as well stick with them. If they hadn't been tempered by their coalition with the Lib Dems, what might they have done by now? They would, Clegg thinks, have called for a "full withdrawal from the European Union".

They would also have taken a "totally different approach to fiscal consolidation than they have". You only have to listen to George Osborne to hear that: he wants the structural deficit dealt with and he wants a reduction in the size of the state. That sounds rather good to me. Clegg thinks it would have been "economically nonsensical" and "socially regressive".

Shrinking the state

I suspect we aren't going to half agree on this one. I ask about the size of the state. Even if Osborne succeeds in getting state spending as a percentage of GDP down to 35%, the UK isn't exactly going to have a small state. This is an enormous state, and it has to paid for by someone.

This brings me to one of Clegg's flagship policies the rise in the personal allowance for income tax. I worry that if people pay no income tax, they feel no responsibility for state funding if you aren't an obvious taxpayer, everything is "free" so why should you care how efficient it is and how much other people have to pay?

This is something Gordon Brown tried to address (albeit in his usual complicated way) by introducing the (now-abolished) 10p rate. He wanted the low paid to pay very little tax, but he wanted them to know they paid something.

Clegg "completely disagrees". The idea that people don't feel responsible for the state because they don't pay income tax is "nonsense". There may be a problem in how they view "the collective state", but that's a very long-term problem. "It has been around for ever." It is, he says, nothing to do with the personal allowance. Nothing.

We have to leave that one there. I move on to the size of the state in general. A presenter on the BBC a few weeks earlier (one of the ones who isn't that good at maths, I guess) had referred to Osborne's plan to have a go at cutting the size of the state as a percentage of rising GDP as "utterly terrifying". But how can 35% of GDP be terrifying? Clegg nods. But then he says that there is no "magic number" for the size of the state no one number that is OK.

On this I have to disagree. Firmly. Because there is a magic number. It is the revenue you can raise in tax as a percentage of GDP. And in the UK that doesn't go above 36%. The state has to be sustainable. So there's your magic number. I'm not arguing on this one. It is what it is. No person and no state can live beyond its means indefinitely.

The falling tax take

We move on to why the income tax take in the UK is falling, even as employment rises. Clegg worries that it is a result of having so many people starting out in low-paid work. I mention the personal allowance take people out of the tax net and you will clearly have a lower tax take. We don't dwell on that.

I also note that savings are amazingly untaxed in the UK now: anyone remotely savvy keeps everything in an individual savings account or a self-invested personal pension, and fiddles around with a bit of Enterprise Investment Scheme tax breaks, and entrepreneurs' relief on the side. That makes a difference.

But we also talk about the untaxed part of the economy, which I am convinced is much bigger than it was pre-crisis. That's partly because the black economy always grows in times of recession. And it's partly because the rise of the internet (and the sharing economy) has made it easier to earn cash on the side. But it is also about modern working practices.

If you work freelance or on contract as more and more people do you can run your income through a personal services company, which can allow you to cut your tax bill substantially. The personal tax system needs a revamp, just as much as the corporation tax system does. On that we agree.

Clegg has to go we've already talked for long enough to make him late for his flight. As he heads for the door, I ask him if he would ever go into a coalition with the Scottish National Party? He doesn't think it will be an issue they won't do "nearly as well" as people think.

If they did? He isn't getting "into ifs". OK, I say, is there anyone you would never go into a coalition with? That's easy. "Ukip."

Nick Clegg - his rise to power

Nick Clegg studied archaeology and anthropology at Robinson College, Cambridge. After graduating in 1989, he attended the University of Minnesota for a year, doing a masters in political philosophy, followed by a masters in European affairs from the College of Europe in Bruges.

He worked in journalism and public relations until 1994, when he joined the European Commission (EC). There, he was involved in aid programmes for the former Soviet Union states and headed the EC's negotiating team for the Chinese and Russian accession talks to the World Trade Organisation.

In 1999, Clegg was elected as a member of the European Parliament, representing the East Midlands. He stood down in 2004, joined a political lobbying firm and lectured part-time at Sheffield and Cambridge Universities, before being selected as the Liberal Democrats' parliamentary candidate for Sheffield Hallam for the 2005 UK general election.

Following his election, he was appointed as party spokesman on Europe by then-leader Charles Kennedy. He was promoted to home affairs spokesman in 2006 after Menzies Campbell took over from Kennedy, and succeeded Campbell as party leader in 2008.

After the 2010 parliamentary election, he led the Lib Dems into coalition with the Conservatives and became deputy prime minister.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.