The Overspend Gets Bigger

See you at the airport

So what do we make of the budget?

Given his starting point, George did a reasonable juggling job, and managed to sound as if he's serious about getting the economy moving again. His moves on company taxation and fuel duty are welcome, if relatively small... er... beer. His fresh attempt to inject life into the housing market is also potentially helpful, although we need to see more detail before we can be sure it won't simply re-inflate the property bubble and/or expose taxpayers to a huge Freddie and Fannie style default crisis. 

However, looking at the big picture, he failed once again to tackle the rampaging elephant that's still smashing up the fiscal room. That is, he did nothing to bring government spending back down into line with sustainable tax revenues.

Yesterday I took part in a TPA/IEA panel discussion on the budget, and the excessive level of public spending was by far the main concern for both panellists and audience. Unfortunately, nobody could see the current government gripping it this side of the 2015 election, and a Miliband government - with or without the Lib Dems - won't even try. 

By the end of the session I was ready to book a one-way ticket to... well, to where exactly? Cyprus would now appear to be out, and Mrs D's arachnophobia rules out the more exotic destinations. Must get back to researching it.

The following is a summary of my own presentation (some bits are updates of recent blog posts, and I'm afraid there are quite a lot of numbers).

As the Chancellor highlighted in his speech, government departments have been significantly underspending against their original budget allocations. The underspend for 2012-13 is now put at £11 billion, an unprecedented shortfall which has narrowly prevented this year's borrowing increasing above last year's (£120.9bn vs £121.0bn). However, of much more significance is the continuing overspend against the government's revenue base, a problem he did not address in the budget.

The Coalition's first budget in June 2010 set out a path for public spending that saw it rise from £669bn in 2009-10 to £757bn in 2015-16, an increase of 13%. Given the urgent need for fiscal consolidation, many commentators - including the TPA - thought that not nearly tough enough. However, it was justified on the basis that economic recovery would boost revenues and close the deficit, just as it had done after the recessions of the early 1980s and 1990s.

Unfortunately, that hasn't happened. Growth has been feeble, and the economy is now (2012-13) 4% smaller than it was forecast to be back in 2010. Worse, according to the OBR's latest forecasts, the shortfall is expected to go on getting bigger, reaching 7% in real terms, and 9% in cash terms, by 2015-16. Over the whole of this Parliament (2010-11 to 2015-16), the OBR now reckons the economy will grow by just 6%, compared to its June 2010 forecast of 14%.

Relative to our economy and its capacity to bear taxation, government overspending is even worse than it appeared in June 2010.

Spending still planned to increase

The following chart shows spending in cash terms (Total Managed Expenditure - TME) since the start of Labour's reckless spending surge. As we know, that surge more than doubled spending in cash terms and even in real terms increased it by one-half. From 2009-10, it compares three plans:

• Labour's final plan
• The Coalition's first plan - June 2010
• The Coalition's latest plan - March 2013 

Key points to note:

• All three plans incorporate a sharp slow-down in growth from the surge years, but there's not a huge difference between them. 
• Spending in 2013-14 is now planned to be £720bn - almost exactly in line with the £722bn "spending envelope" set out in June 2010. Which in the narrow terms of public spending control is pretty precise management, and much better than most previous governments have managed.
• However...

...because economic growth and revenue have both fallen well below what had been expected, as a percentage of GDP spending has turned out higher than planned, and revenue much lower. Spending is now running at 45% of GDP, a mere two percentage points lower than what the Coalition inherited back in 2010. Revenue will once again fall well short of spending, at 38% of GDP, leaving government borrowing an unsustainable 7%.

Spending already far too high

The following chart puts the budget spending and revenue forecasts into context, again showing the entire period from 2000-01 through to 2017-18. The gap between the two lines represents government borrowing.

Key points to note:

• Since the privatisation of Britain's big nationalised industries (which removed a large chunk of trading profits from public sector revenues), no government has managed to raise revenues of more than about 38% of GDP: that seems to be the limit on what is politically acceptable and economically sustainable. 
• The public spending envelope remains substantially oversized relative to sustainable revenue. 
• The projected convergence of spending and revenue over the next five years depends crucially on the OBR's growth forecast being realised. 

The OBR is forecasting average growth over the next five years of 2.1% pa. Given recent growth performance, the continuing problems in Europe, our broken banks, and high energy prices, that may well turn out to be optimistic. If so, the convergence of spending and revenue may not happen at all.

Return to the 70s? 

For example, if instead of 2.1% pa growth, we get a prolonged period of 0.5% pa 1970s style growth, the gap remains stuck at 7% of GDP*. All of which will have to be borrowed.

In its first three years the Coalition has already increased the official government debt (PSND) by well over £400bn. By 2017-18, even on the OBR's forecasts, their increase will be nearly £900bn - more than doubling the debt total they inherited. And the official debt is only one small part of the government's overall liabilities.

Debt piled on debt

According the Office for National Statistics, the government's overall liabilities amount to well over £7 trillion, equivalent to five times GDP. The following chart shows the main components:

Interest on the official national debt is currently running just under £50bn pa. The OBR now forecasts it will increase to over £70bn by 2017-18. 

However, all of the government's liabilities require servicing, and if we add in those public and state pensions payments, along with PFI payments, total debt servicing is already running at £170bn pa, and is set to increase to £220bn by 2017-18. 

That means that by 2017-18, over 30% of government revenues will be earmarked to service past liabilities rather than to pay for current services.

Public spending that doesn't add up

With an increasingly large chunk of public spending earmarked for debt servicing, and NHS, Schools, and Aid spending protected inside their preposterous ring-fence, only around one-third of the spending is available for cuts. Nobody has a clue how that can be done inside George's existing spending envelope, including George himself. 

If we don't get a big shot of growth soon, we are facing a massive spending crunch. Forget public sector pay and benefit freezes: we are talking Irish-style 15% across the board cuts for everything. 

*Note I have calculated the impact of lower growth on the public finances using the OBR's own ready reckoner. It's almost identical to the old Treasury rule of thumb blogged here, and it says that a one percentage point shortfall in GDP raises public sector borrowing by 0.7% of GDP after two years. That comprises 0.5 percentage points on the spending ratio, and 0.2 percentage points off the revenue ratio.

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Spending Your Money

The short version

We assume everyone watched Martin Durkin's spirited assault on Big Government last week (clip above and you can watch again here).

But discussing it with various people since, Tyler has been struck by how few actually realised that government is now spending more of our money than it allows us to spend ourselves*.

Say it again - government is now spending more of our money than it allows us to spend ourselves.

According to the latest OECD stats, this year the UK government will spend an astonishing 53% of our national income. That's the figure quoted by Durkin in his film, and also the figure we show on BOM's sidebar (it relates to so-called General Government, comprising both central government and local authorities).

So - just to hammer home the point with an outsized mallet - for every pound we earn as a country, the government spends 53 pence of it, leaving us with just 47 pence.

And our government is spending more of our income than the government of virtually any other major economy, and way more than the OECD average:

Greece and Ireland, those notorious fiscal basket cases?

Yup, you guessed it - their governments are actually spending less than ours (48.8% in the case of Greece, and 46.9% in Ireland).

Now for some unfathomable reason, HMG does not admit to such a high percentage in its own figures. In fact, George's June budget reckoned the percentage of GDP spent by government this year will "only" be 47.3% (2010-11).

But as we've blogged before (eg here), there are some serious doubts about the official HMT figures. In particular, some of their spending figures are included net of receipts (eg spending on public sector pensions). We'd rather trust the OECD numbers which conform to an internationally agreed and monitored standard.

More fundamentally, the HMT figures calculate the government's share as a percentage of GDP at market prices, rather than the much more meaningful - and lower - GDP at factor cost.

Que?

In plain English, GDP at market prices is measured including the taxes government levies on goods and services, including VAT. Thus, the more government taxes our spending - by for example increasing VAT to 20% - the higher is GDP at market prices. Which means that government spending as a percentage of GDP is correspondingly reduced.

Or in other words, by increasing spending taxes, HMG can manipulate down its own share of GDP.

GDP at factor cost excludes such sales taxes and gives a much truer measure of our real national income, and the share taken up by government.

BOM's old friend Prof David Smith has spent his entire distinguished career monitoring Big Government (or Leviathan as he prefers to call it - see clip above). And he has calculated his own measure of government's share in GDP, measured at the more meaningful factor cost. Here's one of his charts showing what happened over the last century:

Take a moment to study that chart (click on image to enlarge).

A hundred years ago, before WW1, government spent 10 - 15% of our national income, and private citizens got to spend all the rest - ie the money they'd earned. But in the following 70 years, successive governments grabbed more and more, so that by the early 80s they were spending over half our national income.

There then ensued nearly two decades of real struggle under Thatcher, Major, and Prudence, to rein back. Even so, government's take never fell below 41.8% (touched briefly in 1999).

Over the last disastrous decade, of course, it's been one-way traffic. Nay More Boom 'n' Bust Brown let rip, we hit the inevitable bust, and once again we find ourselves with government spending more than half what we earn.

Now let's all remember that simple fact. And let's all try to make sure we tell others around us.

And next time some self-serving Big Gov type pops up on telly saying we could solve the fiscal problem by increasing taxes, feel free to shout at him/her.

The problem is not too little tax.

The problem is too much government spending.

*Footnote - It should be noted that the OECD's 53% figure covers all categories of government spending, including transfer payments (mainly welfare benefits and increasingly debt interest payments). That of course is normal fiscal accounting practice, as also applied by HMT. It shows the proportion of our national income spent by the government. Now, clearly we aren't saying it all goes on direct consumption by the government, because around one-third of it goes on those transfer payments, which the government routes into somebody else's pocket. But the key point is that the government is taking 53% of national income away from those who have actually generated it. For sure, the government then hands a chunk of it out to citizens it considers deserving, but that shouldn't detract from the essential point. The burden on those famous wealth creators (via current and future taxation) is 53%.

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Is There An Alternative To TINA?

What happens when government debt goes bad

On the morning after the head of the OECD likened the Greek debt crisis to an Ebola Virus sweeping across Europe, Tyler took part in a radio discussion with Stuart Wallis, the head of the New Economics Foundation. All agreed that HMG's deficit must be tackled, but at issue was whether we could avoid painful spending cuts by increasing tax revenues instead.

The NEF has just published a report which argues that precise case. It says:

"... the public deficit could, in fact, be substantially offset by a range of progressive measures on tax...

...the Green New Deal Group estimate that more than £100 billion a year is lost because of abuse of loopholes in the tax system, tax bills remaining unpaid and from illegal non-payment of tax...

This is not about new taxes, simply collecting taxes that are due, closing loopholes in the tax system and clamping down on illegal non-payment of taxes. In addition, as the Green New Deal group show, there is an enormous range of additional taxes available that would make the UK’s tax system fairer. Those with the greatest capacity to pay tax could carry more of the burden."

Which all sounds much easier than cutting schools, hospitals, and welfare. So is it an alternative to TINA?

To start with, raising revenue painlessly by cutting down on tax abuse sounds like a no-brainer. It's an argument the Lib Dems have already deployed, and we will be hearing a lot more of it over coming months.

We've blogged this so-called Tax Gap - ie the gap between what the taxman should get and what he actually gets - many times (eg see here, here, and here). Of course, in reality it's very difficult to know how big it is, because, like the man said, we don't know what we don't know. But we came up with a total in the range £60-80 bn pa, largely attributable to the black economy. That's some way short of the £100bn quoted by the NEF, but still a big chunk of potential revenue.

So we can all agree there are uncollected taxes out there, and they should be collected. The problem is that governments have been trying to collect uncollected taxes ever since the Emperor Caesar Augustus invented modern taxation back when Jesus was born. And while they always have to keep trying, there is no reason to believe we will now suddenly discover how to do it better. Especially when you understand that compared to tax collecting authorities elsewhere - eg Greece - HMRC actually does reasonably well.

Which means the NEF approach ultimately has to fall back on raising tax rates. And their paper makes a number of suggestions.

First, they'd completely abolish the earnings cap for National Insurance Contributions (NICs), which would mean anyone earning over £44000 pa would face a tax rise. They'd also make investment income subject the NICs, which would mean for example, increased tax on pensioner savings income. And they'd impose a range of extra bank taxes, including a tax on all payments you make from your personal bank account.

But their main focus for higher taxes would be the rich, whom they define as anyone with an income above £100k pa. So all incomes above £100k would be subject to the new 50% tax rate (instead of just incomes over £150k, as now), and tax allowances would be limited to £5000.

BOM readers will be quite familiar with the problems here.

For one thing, only 2% of incomes are actually higher than £100k pa, which means that whacking those incomes will never raise nearly as much as an increase in broader taxes.

Also, as we've blogged before (eg here), people faced with higher taxes invariably change their behaviour, cutting their liability by working less or finding some new workaround. So the tax take is always a lot less than the number the government first thought of. For example, even on the government's own numbers the new 50p tax rate will only raise just over £2bn pa, and most independent analysts (eg the IFS) think it will raise a good deal less - maybe nothing at all.

And more generally, as we've blogged to death, higher taxes cut economic growth. And given our current dire situation, cutting economic growth is not something any of us should feel comfortable about. Growth is the only way we can get out of this hole, and lower taxes are just about the only reliable tool at our disposal to deliver that growth.

So we have to disagree with the NEF.

Sadly, there is no painless alternative to TINA. In reality, there is nothing for it but to grit our teeth and cut public spending - exactly as recommended in the TPA's most excellent new book, How to cut public spending (and still win an election) - available for all good book stores now.

And if we don't?

We'll simply run out of road, and find ourselves facing our own anti-IMF riots, just like the ones in Greece (pic).

PS This morning's discussion took place on Colourful Radio, a new DAB digital station for London. It specialises in soul music and current affairs - a fantastic combination. But the best bit is that it was set up and runs with no taxpayer support whatesoever - nothing from the government, nothing from the Mayor, and nothing from some obscure media engagement quango. This is private enterprise in action, and they will sink or swim by meeting the needs of their customers. May we wish them the very best of luck.

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Avoiding A Brown Recovery

Posterwise, the Tories are back in the groove. Good.

Even better, George is ruling out further tax rises*. Hurrah!

But when (please God) they hoof out Brown and this bunch of bankrupt has-beens, they will actually have to deliver on their promises. And that means reversing both growth destroying tax rises and interest rate increasing debt mountains. In other words, it means substantial spending cuts.

Which is why Cam and George need to be very careful about adding to the difficulties already caused by ring-fencing the NHS and overseas aid. Sprinkling around spending goodies like today's £200m for new cancer drugs may deliver a short-term high, but it will make life even more difficult post-May.

We can see just how difficult by taking another look at the history of cuts over the last half century. The following chart shows year-on-year percentage changes in total public spending, adjusted for inflation (TME - Total Managed Expenditure). And as we can see cuts are very rare indeed:

A few key points to highlight:

1. Life on Mars - the biggest cut by far was that achieved under the IMF cosh in 1977-78; it was driven by cuts in both current and capital spending; but note that even that legendary cut only amounted to 4% in real terms, and it was reversed within two years.
2. Ashes to Ashes - the two smaller cuts under Lawson in the late 80s reflected a recovering economy trimming welfare spending; but a key driver was years of severe restraint in current spending programmes, combined with further deep cuts in capital spending.
3. Things can only get worse - in the mid-90s, Clarke managed to cut spending two years on the trot (the second helpfully delivered to his successor in 1997-98); a rapidly recovering economy helped, but once again, a key driver was capital spending, which fell by 35% in two years.
4. Dust to dust - Labour's planned cuts (in red) are a bad joke: as we've blogged before, they amount to an actual increase in total spending over the next 4 years.

This record puts George's task into its full horrific context. Because depending on whose estimates of the structural fiscal deficit you believe, he needs to cut spending by between 10% and 20% in real terms - and also, keep it down afterwards. Which is way outside the range of anything that any living Chancellor has ever achieved.

And this time, capital spending is so much less to begin with. Back in the 70s public sector capital spending actually exceeded public borrowing - even when the latter ballooned. Which offered a fairly easy cuts target. However, in today's post privatisation world, public sector capital spending is much less than our huge deficit, so no easy option there.

But then, what do you expect? This is precisely the kind of disaster you get left with when you elect a clothead high-spending clownfest like the present crew:

They've spent so wildly that even a 20% spending cut from next year's planned level would still only get us back to the level of spending in 2004-05.

*Terms and conditions doubtless apply to George's tax offer - but the main thing is that George says there will be “no further tax increases in the emergency budget... We’ve set out our plans, they don’t involve an increase in VAT.”

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So Who Do We Trust To Get Us Growing Again?

Listening to Lord Mendacity's dismissal of Britain's top businessmen today, you get the authentic Labour view on the way economies work. Despite all the NuLab spin, they have never really accepted the idea that sustainable growth is delivered by private enterprise not by government spending.

As we blogged here, their plan to hike the jobs tax will be a disaster, costing up to 500,000 jobs. And George is absolutely right to make it his top priority for cutting (or at least rescinding the increase).

But Mandy clearly doesn't understand that. Instead, he comes up with the utterly preposterous idea that these top business leaders are whacking Labour policy because they have somehow been deceived by the evil Tories.

Did Mand not read what they wrote? Just for future reference here are the key bits:

"In the last few years, the private sector has improved its productivity by around 20 per cent, while productivity in the public sector has fallen by three per cent. Savings can be made by removing the blizzard of irrelevant objectives, restrictive working practices, arcane procurement rules and Whitehall interference... As taxpayers we would welcome more efficiency in government.

As businessmen we know that stopping the national insurance rise will protect jobs and support the recovery.

Cutting government waste won’t endanger the recovery – but putting up national insurance will."

Spot on. In fact, it could easily be Tyler talking.

But it most certainly couldn't be Labour.

As we must all understand, the very biggest of the several big challenges ahead of us is how to get the economy growing sustainably. Under Labour, growth was fueled by a huge debt bubble and a crazy ramping up of public spending. But that has ended in catastophe, and we must now find another way.

Next year, even on the government's over-optimistic numbers, public spending will account for nearly half our GDP (48%). And Labour believes that to be the essential prop supporting future growth.

But there is a very different view, partly but not yet clearly, articulated by Cam and George. It is that continued high public spending and high government borrowing will soon undermine the very growth Labour say they want. It will happen via a number of different channels, but most dramatically via the impact on interest rates.

And most helpfully, Policy Exchange has just published some work on how big these effects might be. In particular, they have looked at the likely impact of our huge fiscal deficit on gilt yields and interest rates.

There is a considerable economic literature on this question, and its conclusions are unambiguous - higher government borrowing pushes up interest rates. Quite a lot. In fact, the literature suggests that the current level of UK borrowing will have the effect of pushing up gilt yields by 2-4% over where they would have been without the deficit.

Andrew Lilico and his Policy Exchange colleagues have also done their own analysis, and here's one of their pictures:

As we can see, countries with the biggest deficits tend to have the highest borrowing costs. And we can also see that our bond yields look low relative to the average relationship.

Why? Well, partly because the Bank of England has artificially supported the gilt market by buying the best part of £200bn of gilts as part of their Quantitative Easing programme - a support that has now gone. And partly because the market still believes there will be a Tory government that will cut the deficit - a support that will go if Labour get back.

The chart also shows just what happens to borrowing costs when market confidence goes - look at where Greece is.

To bang the message home, Policy Exchange works out what their expected increase in borrowing costs would mean for mortgage costs:

"In the UK a rise of 1%-2% in mortgage rates would add some £700-£1400 to the average annual mortgage bill."

And that is precisely the kind of effect that would stop our anaemic economic recovery dead in its tracks.

Which is why Labour's policy of continued high public spending is so hare-brained. Far from supporting growth over the next few years it will undermine it. From higher jobs taxes to higher mortgage rates, it is a disaster in the making.

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How To Stop Britain Going Bust Again

Getting this guy away from the controls would be a good start

I've just read George's piece in today's Times, How to stop Britain going bust again. And you know what? It's good.

He says we must turn away from "the failed model of debt-fuelled growth that led us into this mess", and develop "a new British economic model that learns from the mistakes of the past".

Yes, of course, talk is cheap. But here's what we like:

1. First and foremost, the "new economic model requires government to live within its means... The overriding objective of fiscal policy must be to provide [a] credible deficit reduction plan... That credible plan must eliminate a large part of the structural deficit over the next Parliament, starting in the coming financial year."
2. "Britain’s new economic model must be built on saving and private sector investment, not the unsustainable public spending and consumer debt of the past ten years. Exports and business investment provide the key to a sustainable recovery... We need to become competitive again. Simpler taxes with lower tax rates, removing employment taxes on new businesses employing new staff, stopping the remorseless rise of red tape on small businesses."
3. "The private sector must take the lead, but government must help with a modern planning system... and providing modern transport infrastructure. Above all, with a record one in five young people out of work, government must provide the education, training and welfare reform we need to get Britain working."
4. We need "a new banking system... a regulatory system that commands confidence, with the Bank of England in charge instead of the old failed tripartite regime... Britain becoming a champion of internationally agreed structural reforms of the kind President Obama proposed last week, rather than remaining wedded to the old unstable structures that the current Government has encouraged."

And what do we not like?

Well, despite the manifold climate swindles that are now coming to light on a daily basis, George still wants to spend more of our money on "green investment"; there's still no indication of what spending he'll cut, or how he'll stop himself raising Vat; removing "a large part of the structural fiscal deficit over the next Parliament" may not be ambitious enough to head off the rise in interest rates; and there's no mention of serious money-saving public sector reform, such as fiscal decentralisation, or breaking up the NHS, or even ending national pay bargains.

Still, for all that, this is a distinct whiff of that old time religion - government to be be hacked back, both in terms of spending and regulation; growth to be driven by the private sector, fuelled by lower taxes and a bonfire of controls; working age benefits cut to reduce indolence and vice; structural reform to stop too-big-to-fail bankers gouging taxpayers via open-ended guarantees.

All he's got to do now is deliver.

Which we will be watching very closely.

PS Does it matter that tomorrow's ONS report will (probably) show our recession ended in 2009 Q4? Well, clearly it's better that we're no longer heading down, but apart from that, there won't be much to shout about. We will still have lost around 6% of our GDP since the peak, and we'll be 10% below where Clown Brown predicted we'd be by now. What's more, GDP growth from here on is likely to be pretty sluggish, even with our improved competiveness from sterling's collapse. Apart from anything else, government spending has to be cut, taxes are heading up, and there's no way interest rates can stay down at current levels. So let's see how much puffing the Clown attempts.

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Putting Lead In George's Pencil

A bit thin and droopy, but at least he's got one

George was interviewed by Mr Marr this morning (watch again here), and although most of the interview all too predictably got stuck on bankers' bonuses, he did give us a quick flash of his pencil, and how he's been wielding it to pencil in his list of spending cuts.

He mentioned the following headings:

• "Public sector pay restraint" - could mean a freeze, maybe for two years (George and Cam will doubtless share the pain with a ministerial pay freeze)


• "Transfer payments" (aka welfare benefits) - he mentioned abolishing tax credits for those on £50k, but could easily encompass the abolition of non-means tested child benefits, and other "middle class welfare" (universal benefits as they used to be known)


• "Procurement and the like" - presumably cuts in defence equipment, certainly scrapping whacky IT projects like the NHS supercomputer, and probably sharp across the board reductions in all capital procurement (aka "investment")


• "Public sector pensions" - George focused on the usual suspect "fat cats", especially those who take their pension and then get rehired as consultants, but presumably he also plans to scrap the current expensive final salary arrangements across the board.
  

Unfortunately, instead of quizzing George on the details of his list, Marr was much more interested in the politics-of-envy sideshow of bankers bonuses (see previous posts here and here, and Guido's spot on comment here).

Still, if followed through as we surmise, these cuts would deliver some real savings. Freezing public sector pay for two years would save around £10bn pa (eg see this blog), and truncating "middle class welfare" could save another £10bn pa. Add in another £10bn from procurement/investment cuts, and suddenly you're looking at a total £30bn pa. Cutting public sector pensions benefits would also generate savings running into many billions, although not in the short-term: like all pension arrangements, changes in benefit accrual rules take years to work through.

So hurrah! George has shown us he does have a pencil, even if it looks like it needs sharpening, and may not yet be quite up to the job.

Now, as we all know, the reason George and other politicos are so unwilling to be specific about spending cuts, is that all cuts involve losers. And losers have a horrible tendency not to vote for you.

So how do we counterbalance that? How do we make sure that the winners know who they are and understand how they benefit from the spending cuts?

In theory it shouldn't be too hard - the winners are taxpayers, and they benefit by having to pay less tax. But in practice, whereas the losers from a spending cut tend to lose A Lot (like, maybe their jobs), the winners from a tax cut are generally spread across millions of taxpayers, each of whom only benefits by a relatively small amount.

On the other hand, many a mickle makes a muckle, and when you add up all those relatively small amounts across all the spending cuts our politicos shy away from, the total burden on taxpayers is huge. The fundamental problem is that most people have no idea just how much tax they are paying.

And that's bad. Because it means that taxpayers in general are not nearly angry enough with our high spending politicos, even though it's costing them getting on for half their income. And by the same token, they give far too little credit to politicos who promise to cut back. It is an imbalance that virtually ensures government spends too much.

Now, a small businessman has come up with a great way to redress that imbalance. He's begun presenting his customers with a bill that breaks down the total between what goes to him and his workers, and what goes to the government. And the latter includes not just VAT, but also his business rates, employers' national insurance, the estimated tax and national insurance paid by his workers, insurance tax, climate levy, landfill tax, etc etc etc.

Michael Van Clarke runs a hairdressing salon, and is the brother of fellow hairdresser Nicky Clarke (the most excellent non-people's-peer - see this blog). It would seem he charges a breathtaking £374 for a haircut, which would keep Tyler in haircuts for several decades. But no matter: the important point is that when the customer gets the bill they see that virtually half the cost goes straight to the government. Or to put it another way, without all the taxes, the haircut would only cost half as much:

Van Clarke says:

“People just don’t understand how much tax they are actually paying; it’s at least twice what they think.

In most businesses, about half of your bill is made up of various taxes and I think there should be far more awareness of that.

We have a high-value clientele — movers and shakers from all walks of life — and they have no idea of the amazing amount of tax that is built into their bills. There has been a very positive reaction from our clients, who now see that what we are charging is not as expensive as it seems.”

This is a brilliant idea. An idea that could transform public perceptions, and get taxpayers demanding some serious spending cuts.

It's an idea that could put some real lead in George's pencil.

So how can we help it spread?

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Stuck Up Queer Street Without A Golden Goose

All that remains from the fat years

The latest public borrowing figures are worse even than Tyler expected.

Last month the government managed to borrow £13bn, taking the total for this financial year to £41.2bn - twice the comparable figure for last year. It tells us that borrowing for the year as a whole will almost certainly be over £200bn, rather than the £175bn forecast in the budget.

As for debt, we've already reached 57% of GDP, well on the way to that scary 100% level - and that's on the government's own massaged definition (the same measure was at 40.6% in 1997).

So how did we get here?

Well now, you'll have to pay close attention to this next bit because it is very technical and incredibly difficult for ordinary people and government ministers to follow. Most of the time, only Highly Trained Economists like Tyler can grasp it.

You see - now concentrate because I'll be asking questions later - the government has been spending more than its income.

Get that? Its spending exceeds its income.

Understand?

No?

OK, let's try to make it nice and simple with a picture. Here's a chart showing government expenditure relative to government income since 1997 (totals over previous 4 quarters):

Now, look at it carefully. Can you see how for a few years after this government came to power, they more or less kept income and expenditure in line?

And can you see how in 2001-02 they stopped doing that, and instead let their spending rip well ahead of their income?

Now, children, do you know what happens to ordinary people when they do that?

Yes, that's right - they end up in Queer Street. And they have to sell their own body parts for a few pence simply in order to eat!

But some people - notably the present government - used to think that couldn't happen to governments. They used to think the government could always get more money from a Golden Goose called The Taxpayer.

And for a few years, it seemed to work. Spending was running well ahead of income, but the Royal Goose Master stuffed the Golden Goose (aka the financial and property markets) so full of special high octane corn, that egg production kept growing.

Then one day, the Goose could take no more. By now monstrously fat, with a hugely engorged liver, the poor thing waddled out into the middle of Canary Wharf and exploded. Bang! Just like that.

Which is why the government's income is now plummeting (see pic).

So what is to become of us?

Nobody knows.

But what we do know is this clothead government has no serious ideas whatsoever. In fact they are hiding under the stairs in the Royal Goose Master's house trying to ignore the latest crop of disasters:

• Collapsing tax revenues at HM Revenue and Customs - down £32bn last year
• £140m error in MOD's accounts
• Rising losses to tax credit fraud and errors - now up to 8.8% of claims
• Unauthorised £24bn bank bailout by HM Treasury
• £1.5bn on another useless training scheme (Train to Gain)
• etc etc

All we know is that we have another nine ghastly months of this.

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