"Our country faces an extremely difficult and painful time. Our economy is in recession. It looks like it will be worse than in most other countries. More people losing their jobs and their homes.
More businesses going to the wall. More people are seeing their dreams smashed and their security ruined.
"To come through this - and to come out of this - we will need strong, determined and honest political leadership. So people need their politicians to be straight with them not just about the about the situation we face, but about what they believe and how they would react.
BELIEF
"I believe that free enterprise, open economies is best for creating the prosperity we need, for spreading the opportunities we want and for funding the public services that we depend on. I believe that the first economic responsibility of the state is to provide, through monetary policy and independent setting of interest rates, a stable environment of low inflation. I believe in fiscal responsibility: that governments should run a surplus in good years so they can help people out in bad years. But I believe that the best way to raise our growth rate, economic productivity and living standards is not through pulling government levers from above, but through so-called 'micro-economic' supply-side reform.
"Simpler taxes and lower tax rates. Better education and training. More competitive markets. Roads, railways and ports that actually work properly. Leading the way with new technology and innovation. And I believe that in a recession we must help people, not just by paying benefits to those who lose their jobs, but by straining every sinew to help keep them in their homes and to find new jobs.
IMPLICATIONS FOR TODAY
"So what do those beliefs mean for today's challenging and difficult circumstances? Politicians shouldn't be stubborn and cling to beliefs if circumstances render them obsolete.
"I am practical man, not an ideologue. But I do not think, as some do, that this recession should somehow signal the end of the free market system. Yes, the financial sector needs proper regulation and - most important of all - regulation by institutions, including the Bank of England - that command respect and authority. But this should not mean the end of deregulation elsewhere. People and businesses, large and small are crying out for less red tape. There is much regulation in our economy and in our society today which destroys wealth and protects nothing.
"Neither do I think, as some do, that this recession means we should revoke the independence of the Bank of England in setting interest rates. I have seen at first hand the damage that political interference can bring. Any short term advantage from rapid action would soon be outweighed by the long term destruction of credibility. And in any event, now we can see an independent Bank of England aggressively cutting rates. I do think that overall, it is in monetary policy that we have the most to learn.
"Monetary policy is not just interest rates: although of course, interest rates are a vital component of monetary policy. We face something today not really experienced by anyone in either government or opposition - a sharp contraction of credit and money and deflation of prices. Simply cutting interest rates and appealing to banks to pass on the cuts may well not be enough. We may need even more action to strengthen banks, to get credit moving, and to ensure that loans are actually made. There is a desperate need in the real world to see real interest rates charged by real banks to real businesses and real homeowners actually come down.
"But it is not just the price of money - the interest rate - that is the problem. It is the quantity of money too. To help ensure that credit and money start to flow again we may need radical new approaches that recognise how the existing banks are still suffering from the trauma of toxic assets and massive over lending.
FISCAL POLICY
"And that brings me to fiscal policy - to taxation, to spending and to the gap between the two that is met by government borrowing. In a recession tax revenues fall and government spending, not least on benefits, rises. We should let these 'automatic stabilisers' operate. But should we embark on an immediate and large-scale exercise in additional borrowing - adding permanently to our national debt?
"My answer is that we should not. I don't believe we can afford it. I don't believe it will work. And I believe it means running risks that we should try to avoid. Let me take each of those in turn.
AFFORDABILITY
"Britain enters this recession with one of the largest budget deficits in the modern world. The gap between the tax that comes in and the spending that goes out is likely to be £60 billion this year. Forecasters are pencilling in numbers of over £100 billion for next year. That's another £4,000 per family.
"Of course those elements of the borrowing that are related to the recession - lower tax receipts and higher benefit spending - they will be reversed as the economy recovers. But the discretionary parts - the extra things the government chooses to do - they have to be paid back by higher taxes in future or in spending cuts.
"Gordon Brown is talking about borrowing an extra £30 billion. That's a £30 billion Borrowing Bombshell - and let me tell you what it would mean. An eight per cent rise in income tax. Or a six per cent rise in VAT. Spending priorities shifting from new schools to educate our children and more police officers to keep our streets safe to servicing the growing interest on our debt.
"Gordon Brown knows that borrowing today means higher taxes tomorrow. If he doesn't tell you that, he is deliberately misleading you.
"For my part, I don't believe we should rack up those debts for us and our children to pay in future. And more immediately, I don't want us to put a drag anchor on recovery by having to raise taxes just as the economy starts to grow again.
EFFECTIVENESS
"But it's not just that embarking on a government borrowing binge to pay for tax cuts or spending increases is dishonest and unfair. There is little evidence that it will actually work.
"In Japan they continually tried to kick-start their economy by repeatedly pushing through an unfunded fiscal stimulus. Between 1992 and 2002, Japanese government net debt grew by fifty-eight percent of GDP. Yet, over the same period, their economy grew by only nine percent - that's less than one percent a year. The result was a 'lost decade' of stagnation, a crippling debt burden, and a landscape littered with endless - and embarrassing - white elephant public works programmes.
"But that's not all. Adding to Britain's already massive structural deficit could be self-defeating - making things worse rather than better. As Gordon Brown's Treasury warned as far back as 1999, "loosening fiscal policy when the underlying structural fiscal position was poor could damage consumer and business confidence, thus having the opposite effect to that intended." In other words, if your borrowing is already high, more borrowing could damage economic growth, not kick-start it. And that brings me to the point about risk.
RISK
"In the current discussion about Gordon Brown's abandonment of prudence in favour of extra borrowing, people have assumed that the only question is "how much more does the British government want to borrow from the markets?" As George Osborne has powerfully, and rightly, argued, at some point the question becomes "how much more are the markets prepared to lend?"
"There are two consequences of this question being asked. First, long-term interest rates rising as investors require a risk premium for providing the extra debt. Second, your currency falling as investors lose confidence in your economy.
"Gordon Brown put it quite well when, back in 1992, he said: "Let us be clear: the weakness of the currency is the result of the weakness of the economy which is in turn the inevitable result of the weakness of government."
"Over the past three months more or less since Alistair Darling announced in July that he was tearing up his fiscal rules we have seen the sharpest depreciation in sterling in modern times. Sharper and larger than any other major currency in the world. And sharper than anything we saw in the previous Labour devaluations of the 1960s and 1970s, or even the year after Britain's exit from the ERM.
"More strikingly still, the international markets are now demanding almost double the risk premium for British government debt than they demand for German government debt. For the first time in a long time, the markets are beginning to ask if the British Government can pay its debt.
THE APPROACH OF GORDON BROWN
"Given all this, we have to ask if our borrowing is already so high, if the pain of future tax rises would be so great, if the evidence for such extra borrowing actually working is so thin and if the risks of excessive borrowing are so real, why is Gordon Brown proposing to embark on this course?
"Perhaps he genuinely believes that in these economic times all his own rules have suddenly become irrelevant. But I'm afraid I don't think that is the whole truth. I think the truth is more like this the severity of our recession and his own excessive borrowing in the good times have, between them, destroyed his fiscal rules so he is now trying to make a virtue of abandoning prudence by throwing money at the crisis, in the faint hope that this may help recovery and in the confident expectation that, even if it doesn't help in the real world, it least looks like a policy.
"I think he prefers that course of action to the alternative, which would be to stand up in front of the electorate and say: "I'd like to help you in this recession by giving you some sustainable tax breaks. I'd like them to last, so I don't give with one hand in one year and take with another the next year. But I can't do that because I didn't put enough money aside in the boom."
"Can you really imagine Gordon Brown saying that? Admitting that he got it wrong? Of course not.
POLITICS OF FISCAL RESPONSIBILITY
"I want to be honest about the problems we face, and how we will overcome them. I have been honest with people about the scale of our social problems - and the long, tough road we have to take to fix them. And now I want to be honest with people about the scale of our economic problems too.
"This means saying things that are not immediately popular. That we can't afford a massive tax giveaway paid for by a borrowing binge. That we can't afford a spending splurge. It means arguing for things that are difficult. For prudence, not giveaways.
"These things may not be immediately popular; they may be difficult - but they are right. The right thing to do for the long term is not always the easiest thing to do for the short term. Let me tell you exactly what I believe is the right thing to do now, in the circumstances we find our economy in today.
ECONOMICS OF FISCAL RESPONSIBILITY
"We must build a low tax, low debt, low interest rate economy for the long-term. We will achieve it through the long-term fiscal strategy that George Osborne and I have consistently set out. This is that over the economic cycle, you hold down government spending so it grows slower than the growth in the economy. Some people seem to think that this commitment is redundant in a recession.
"I repeat, that our commitment is not for any one year not even for one parliamentary term but over an economic cycle. There will, by definition, be growth to share during an economic cycle - or it wouldn't be a cycle.
"This clear and responsible long-term economic strategy means you will be able to get debt down, get taxes down and thereby provide a sustainable basis for economic growth and for investment in our public services. It doesn't mean you might do these things. It means by definition you will do these things.
"And there is a simple, but profound, truth about the past eleven years. If the Government had consistently shared the proceeds of growth instead of spending them - and then some we would today have the low debt, low tax economy - not the high debt, high tax one we have now. We would have put aside money in the good years to spend in the difficult years. We would have fixed the roof while the sun was shining.
LABOUR'S SPENDING TOTALS
"This long-term economic strategy of sharing the proceeds of growth was why, last year, we said we would be sticking to Labour's spending totals for the years 2008/09 and 2009/10. The spending totals for those two years showed public spending to be growing at a smaller rate - two percent - than the predicted growth in the economy - 2.75 percent. At that time, of course, we all hoped that the downturn would be nothing like as deep and as lasting as is now being predicted.
"The European Commission and IMF have both forecast that Britain will have a more severe recession than any other major economy. The Bank of England and the CBI have both warned that our recession will be deep. And in its Autumn Economic Forecasts the European Commission predicted that our underlying structural budget deficit in 2009 would be 5.0% of GDP. That's a massive deterioration from 2.8% in its Spring Forecasts, and significantly higher than any other major European economy. These forecasts have exposed the scale of Britain's borrowing problem.
"What once looked affordable in boom times is now clearly unsustainable. Let me put this as clearly as I can. Unless we curb the growth of spending, taxes will need to rise in the future. Without such restraint, the borrowing bombshell will turn into a tax bombshell.
"And if Mr Brown cuts taxes now, the bombshell will be even bigger. Senior Labour figures have admitted as much, the truth begins to come out. Tony McNulty said any outstanding balance "may need to be found by taxation". Peter Mandelson admitted they would have to make some form of "structural adjustment in the years ahead". And Alistair Darling warned that "at some stage you have to pay for it".
"I think this is the wrong course for Britain. We need change - we need change to defuse the borrowing bombshell, to start living within our means, and to set us on the path to permanent tax cuts in the future.
"So, I can announce today that Labour's economic mismanagement makes it vital for the long-term health of our economy that we set a new path for restraining the growth of spending. That means for the year 2010-2011, we need change, not more of the same. That means reducing planned government spending growth, and not matching Labour's spending plans.
"To be absolutely clear - to stop future tax rises, the growth rate of public spending in 2010-11 will have to be lower than the growth rate laid out by Labour. The growth rates of spending in the years beyond 2010-11, pencilled in by the Chancellor last year, are now also unsustainably high.
"Of course, we will have to look at the Chancellor's new figures when they are presented in the Pre-Budget Report. But the Government's present figures are based on what can only be described as heroic assumptions about our recovery, and the tax receipts it will generate.
"I therefore call today on the chancellor to use his PBR next week to reduce those figures for the growth of spending in years beyond 2010/11. But it is not enough just to change the figures. We have seen too many times how prudence can be abandoned - spending figures can be adjusted upwards and over-optimistic revenue figures are eventually adjusted downwards.
"So I also call on the Chancellor today to establish a new, powerful and independent Office for Budget Responsibility to produce the forecasts and to hold the Government to account - as we recommended some months ago. That combination of affordable plans and independent oversight is the only way to establish the public finances on a sustainable footing for the long term. And that's why I've set out, in the long-term, how a Conservative Government will get Britain back to living within its means by cutting the costs of social failure, reforming our public services and tackling bureaucracy and waste.
"Of course, in the short term, even before 2010, we also need to find ways of changing spending to help people directly. We have already identified some of them. Cutting government advertising and consultancy fees to freeze council tax for two years. Paying people to be in work rather than on the dole with our £3 billion tax breaks for jobs scheme. And we will continue to see what more can be done right now to put money in people's pockets without adding to borrowing and our ballooning national debt. That's why in my conference speech, I asked all my shadow ministers to review all over again every spending programme to see if it is really necessary and really justifiable.
OLD POLITICS
"Of course, Labour will try their old lies about Tory cuts. If they do, we will know they are planning tax rises. But I don't believe they understand what has changed. No-one believes them any more. No-one listens to that kind of lie any more. No-one's interested in the old politics any more.
"The world has moved on. People are not fools. They can see that reducing the increase in Government spending is not a cut, but what it says it is: less of an increase. And in any case, after eleven years of waste and broken promises from Labour, they can see that spending more and more money alone does not guarantee that things get better. They can see all around them that if anyone's actually cutting public services, it's Labour with its targets, bureaucracy and incompetence translating into maternity services, accident and emergency units and GP surgeries all closing down.
"So I'm not worried about Labour's lies, because nobody believes a word Labour say any more. Gordon Brown can bring back Alistair Campbell and Peter Mandelson from the political dead, but he can't breathe life into the old politics. We've all moved on, but Labour are left behind - the same old Labour with the same old spin and the same old politics.
CONCLUSION
"I know politicians always stand up and say "Britain faces a really important choice". But that has never been truer than at this time than now in this recession. On one side there's Labour - armed with a borrowing bombshell to drop on Britain. Offering tax cuts for Christmas while the debt and tax rises will be with us for life. Offering tax cuts before an election to be paid for by tax rises after the election.
"This is not some new paradigm of economic management. It is more of the same economic mismanagement - and more of the same old politics of the short-term. And on the other side, the Conservatives. With an alternative long-term vision for our economy - and the world's economy. More balanced, more green, more advanced: a vision of a new economy that learns from the mistakes of the past and offers real economic change for the future.
"But today it is our duty to set out an alternative course for the immediate priority: protecting people from Labour's recession, and ensuring that the recovery comes as quickly as possible. A vital part of that will be sticking to our commitment to fiscal responsibility. Not spending money we haven't got. But saving it to help people through tax relief. Not borrowing money on the nation's credit card. But getting a grip on public spending and making sure Britain starts living within its means. That's the only responsible way to get our economy back on the path to recovery. And that's the only long-term, sustainable way that we will reach the low tax, low debt economy that the people of Britain - after years of putting up with Labour - not only demand, but truly deserve."