Clegg has gambled his party's future on another hung parliament

His decision to remake the Lib Dems as a centrist "party of government", rather than a centre-left outfit, could prove ruinous if the next election doesn't produce the right result.

This was the speech that many thought Nick Clegg would never deliver. Back in 2010, when millions of Lib Dem voters defected en masse to Labour, Westminster sages predicted that by 2013 he would be in retreat from British politics, preparing for a return to Brussels as the UK's new EU commissioner. But today Clegg stood before his party as a politician reborn, buoyed by the Eastleigh by-election, the economic recovery and the prospect of another hung parliament.

Of the six conference speeches Clegg has given as leader, this was by some distance the best. It was by turns witty, moving and self-deprecating. In a clarion call to Labour supporters in Tory-Lib Dem marginals to come home to his party, Clegg reminded us just how much worse a majority Conservative government would have been: "Inheritance tax cuts for millionaires - no. Bringing back O’ levels and a two-tier education system - no. Profit-making in schools – no. New childcare ratios – no. Firing workers at will, without any reasons given – no, absolutely not. Regional pay penalising public sector workers in the north - no. Scrapping housing benefit for young people – no. No to ditching the Human Rights Act. No to weakening the protections in the Equalities Act. No to closing down the debate on Trident." He pointed out that it was David Cameron who told him during the 2010 leaders' debate that the country couldn't afford a personal tax allowance of £10,000 and smartly took ownership of equal marriage, the coalition's greatest achievement and one that would have been impossible without Lib Dem support. And he reaffirmed his party's status as the surest defenders of civil liberties, the greatest champions of Europe and the most committed environmentalists.

The announcement of free school meals for all infant pupils was a masterstroke, drawing some of the sting from Labour's "cost of living" attack and cheering his party's universalist wing. How foolish of the Tories to press ahead with their discriminatory tax breaks for marriage, giving the lie to their claim that they wish to support all and any "hardworking families".

But there were two problems with Clegg's speech that he evaded, rather than confronted. The first, if we are entering a new era of hung politics, is the question of whether the Lib Dems view Labour or the Tories as their natural coalition partner. Clegg sought to present himself as agnostic between the two but the polls repeatedly show that it is the former that his party's activists and voters are drawn towards. In the case of Clegg, the reverse is the case. Today, he declared that "I don’t look at Ed Miliband and David Cameron and ask myself who I’d be most comfortable with, as if I was buying a new sofa." But his staff routinely brief that they crave a renewal of vows with Cameron. If the next election results in another hung parliament but both Labour and the Tories win enough seats to form a majority government with Lib Dem support his party risks a damaging schism. Jeremy Browne and David Laws will look towards Cameron, Vince Cable and Tim Farron to Miliband.

The second problem is that Clegg's positioning of the Lib Dems as a "party of government" is premised on the belief that another hung parliament is likely in 2015. It certainly appears more probable than it did last year, but recall that while even a seven-point lead wasn't enough for the Tories to secure a majority, a lead of just one-point will be enough for Labour. Clegg confidently ended: "Our place is in Government again." But if Miliband leads Labour into government after 2015, he will be left as the head of a marginalised party, bereft of members and seats (even now, the Lib Dems will struggle to hold onto more than 30), and discredited for a generation by collusion with the party that was for so long its greatest foe.

The Lib Dems' new raison d'être is to serve as a centrist party that takes office in order to ameliorate the extremes of Labour and the Tories. To this end, Clegg has been prepared to trade principle for power. For every one of the Tory policies that he prevented, one can name others that he enabled: the immigration cap, NHS privatisation, £9,000 tuition fees, the VAT rise, the abolition of the 50p tax rate, the benefit cap and the bedroom tax. In the trade-off between principle and power, the danger is that Lib Dems will lose both.

Nick Clegg delivers his speech at the Liberal Democrat conference in Glasgow. Photograph: Getty Images.

George Eaton is political editor of the New Statesman.

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Let's turn RBS into a bank for the public interest

A tarnished symbol of global finance could be remade as a network of local banks. 

The Royal Bank of Scotland has now been losing money for nine consecutive years. Today’s announcement of a further £7bn yearly loss at the publicly-owned bank is just the latest evidence that RBS is essentially unsellable. The difference this time is that the Government seems finally to have accepted that fact.

Up until now, the government had been reluctant to intervene in the running of the business, instead insisting that it will be sold back to the private sector when the time is right. But these losses come just a week after the government announced that it is abandoning plans to sell Williams & Glynn – an RBS subsidiary which has over 300 branches and £22bn of customer deposits.

After a series of expensive delays and a lack of buyer interest, the government now plans to retain Williams & Glynn within the RBS group and instead attempt to boost competition in the business lending market by granting smaller "challenger banks" access to RBS’s branch infrastructure. It also plans to provide funding to encourage small businesses to switch their accounts away from RBS.

As a major public asset, RBS should be used to help achieve wider objectives. Improving how the banking sector serves small businesses should be the top priority, and it is good to see the government start to move in this direction. But to make the most of RBS, they should be going much further.

The public stake in RBS gives us a unique opportunity to create new banking institutions that will genuinely put the interests of the UK’s small businesses first. The New Economics Foundation has proposed turning RBS into a network of local banks with a public interest mandate to serve their local area, lend to small businesses and provide universal access to banking services. If the government is serious about rebalancing the economy and meeting the needs of those who feel left behind, this is the path they should take with RBS.

Small and medium sized enterprises are the lifeblood of the UK economy, and they depend on banking services to fund investment and provide a safe place to store money. For centuries a healthy relationship between businesses and banks has been a cornerstone of UK prosperity.

However, in recent decades this relationship has broken down. Small businesses have repeatedly fallen victim to exploitative practice by the big banks, including the the mis-selling of loans and instances of deliberate asset stripping. Affected business owners have not only lost their livelihoods due to the stress of their treatment at the hands of these banks, but have also experienced family break-ups and deteriorating physical and mental health. Others have been made homeless or bankrupt.

Meanwhile, many businesses struggle to get access to the finance they need to grow and expand. Small firms have always had trouble accessing finance, but in recent decades this problem has intensified as the UK banking sector has come to be dominated by a handful of large, universal, shareholder-owned banks.

Without a focus on specific geographical areas or social objectives, these banks choose to lend to the most profitable activities, and lending to local businesses tends to be less profitable than other activities such as mortgage lending and lending to other financial institutions.

The result is that since the mid-1980s the share of lending going to non-financial businesses has been falling rapidly. Today, lending to small and medium sized businesses accounts for just 4 per cent of bank lending.

Of the relatively small amount of business lending that does occur in the UK, most is heavily concentrated in London and surrounding areas. The UK’s homogenous and highly concentrated banking sector is therefore hampering economic development, starving communities of investment and making regional imbalances worse.

The government’s plans to encourage business customers to switch away from RBS to another bank will not do much to solve this problem. With the market dominated by a small number of large shareholder-owned banks who all behave in similar ways (and who have been hit by repeated scandals), businesses do not have any real choice.

If the government were to go further and turn RBS into a network of local banks, it would be a vital first step in regenerating disenfranchised communities, rebalancing the UK’s economy and staving off any economic downturn that may be on the horizon. Evidence shows that geographically limited stakeholder banks direct a much greater proportion of their capital towards lending in the real economy. By only investing in their local area, these banks help create and retain wealth regionally rather than making existing geographic imbalances worce.

Big, deep challenges require big, deep solutions. It’s time for the government to make banking work for small businesses once again.

Laurie Macfarlane is an economist at the New Economics Foundation