The Liberal Democrats have mounted a strong defence of their spending plans.

Party leader Charles Kennedy set out the party's alternative Budget on Thursday.

Kennedy told a lunchtime meeting hosted by Bloomberg how his party would allocate spending for each department.

And he insisted that his party's spending plans are fully costed.

"The Liberal Democrats no longer argue that extra spending on our priorities must be met automatically by an increase in the total level of taxation," he said.

"It is time for tough choices to deliver Liberal Democrat priorities.

"This does not mean that we have to enter a new era of modest expectations and anaemic aspirations in politics." 

He claimed that scrapping the DTI, drastically cutting the budgets for industrial support and bailouts could save up to £7.5 billion over the life of a parliament.

He also reaffirmed the party's commitment to set a 50 pence rate of tax on people earning more than £100,000 a year.

Kennedy is aiming to see off the challenge from the prime minister that the party's spending policies amount to a blank cheque. 

His speech was followed by a detailed policy presentation by the party's Treasury spokesman, Dr Vincent Cable.

Cable signalled that up to £5 billion could be shifted from some low priority government activities to major policy areas such as education.

"Our approach to this is to emphasise the fact that there are genuine tough choices in public spending," Cable told ePolitix.com in a recent interview.

"We’re trying to pinpoint a substantial number of areas where genuine economies could be made and then how that money could be redirected towards pensions, education and other priorities."

Council tax plan vindicated

Ahead of the event the party received a boost for its plans to replace council tax with a form of local income tax.

The independent Chartered Institute of Public Finance and Accountancy said the plan was a "realistic option".

The group warned that it would be complex to implement and could generate a hike in income tax of up to 6.5 pence in the pound.

"There is no doubt that local income tax is a realistic option as a strong, sustainable source of funding for local services," said spokesman Steve Freer.

"But we should not see it as an easy option. Simplicity of approach would be paramount - taxing personal incomes fairly can be a very intricate process."