This summer we have seen again just how interconnected our world economy has become, as mortgage defaults in America have sent shock waves through financial markets in London. It is a reminder of just how important economic stability is. That is why the Conservative priority is to put stability first and keep interest rates low. But stability by itself is not enough – after all, graveyards are pretty stable places.

In this age of intense international competition we also need to be competitive. That means simpler taxes and lower tax rates. It means an education system that gives more of our fellow citizens the skills they need to share in the world’s prosperity.

Gordon Brown believes that you can either have good public services or lower taxes, but you cannot have both. As a result, his Government has achieved neither. We have the highest tax burden in our peacetime history and yet our cancer survival rates are the lowest in Western Europe and four out of ten 11-year-olds cannot read, write and add up properly.

This record of failure shames us all and demands a different approach. Government should share the proceeds of economic growth between the funding our public services need and the competitive lower taxes our economy demands.

When David Cameron and I first said this two years ago, Mr Brown trotted out the tired old attack that we would cut services. The irony is that he has now been forced to adopt our approach to spending. For in this year’s Budget he committed the Government to sharing the proceeds of growth over the next three years. The spending totals for the years 2008-09 to 2010-11 show public spending growing by 2 per cent in real terms, significantly below the 2.75 per cent trend growth rate of the economy.

As Mr Cameron quickly pointed out to Mr Brown when he replied to the Budget: “He has spent all year attacking our policy and making ludicrous figures for cuts in public spending, but now he is introducing it.”

Today I can confirm for the first time that a Conservative Government will adopt these spending totals. Total government spending will rise by 2 per cent a year in real terms, from £615 billion next year to £674 billion in the year 2010-11. Like Labour, we will review the final year’s total in a spending review in 2009.

The result of adopting these spending totals is that under a Conservative Government there will be real increases in spending on public services, year after year. The charge from our opponents that we will cut services becomes transparently false. At the same time the share of national income taken by the State will start to fall, as the economy grows faster than the government does. Pursuing this approach over an economic cycle creates the headroom for sustainably lower taxes.

We have come to our position by conviction, believing all along in a policy of sharing the proceeds of growth. Mr Brown has been driven here by necessity, thanks to his own fiscal imprudence. For the rapid increases in public spending over the last decade have – as we consistently cautioned – turned out to be unsustainable. Even with successive stealth tax rises, Gordon Brown has still managed to bequeath to his successor the largest budget deficit of any leading European country this year. It is quite something as a Chancellor to make Italy look like a beacon of fiscal prudence.

Faced with this budget deficit, Gordon Brown took two characteristic courses of action. First, he spent the 2005 general election accusing his opponents of lying about the “black hole” in the public finances and then, without blushing, increased taxes after the election on business, oil production and air passengers by £6 billion. Secondly, he delayed the inevitable slowdown in public expenditure growth by delaying the spending review by a year, until his succession to the premiership was assured.

Adopting these 2 per cent a year spending plans has implications for the manifesto that we will offer the country at the next election. It means we will not be offering unfunded spending commitments. Additional spending in one area will be matched by a spending reduction in another.

There will also be no election promises of up-front, unfunded tax cuts. Any reduction we offer in one tax will have to be matched by a tax rise elsewhere. I made this clear more than a year ago, and said that we would focus on the crucial job of simplifying our taxes and on shifting the burden away from taxes on income and savings and towards taxes on pollution.

The public are rightly cynical of promises to cut taxes produced like rabbits out of a hat at election time. Gordon Brown’s preelection budgets have made them wise to that trick. What people want to know is whether you have a long-term sustainable plan to reduce the tax burden on families and on businesses – so that taxes cut one year are not then followed by tax increases a year later.

That is exactly what the Conservatives now have in place. First, it will be done by sharing the proceeds of growth over a cycle so that the economy grows faster than the government. A 2 per cent growth in spending is consistent with that approach; indeed, it is less than the growth in the first Thatcher Government. Secondly, it will be achieved by doing the serious policy work that ensures we get much more for the money we do spend – so that the ever-growing demands on government do not lead to an ever-growing tax bill.

That is what our policy review is doing, as the innovative ideas in this week’s report on education show. At the centre of this approach is moving away from Labour’s top-down, statist methods that have seen hospital wards closing even as NHS spending doubles, and instead trusting people and communities to decide how their tax money is spent.

The objective is a government that is less intrusive, promotes social responsibility and so gives its citizens greater control of their lives. The result is a stronger society and a competitive, low-tax economy. That will never come from this particular Labour Prime Minister. The fight for the lasting change that achieves this vision has only just begun.

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