Privately collected taxes

My old chum Mr Wadsworth regularly puts forward a proposition I just can't understand (as he did yesterday). The starting point, as I understand it, is that governmental activities sometimes result in people making money they would otherwise not make. No one could dispute that. This government-inspired profit is described as "privately collected tax", and that is the concept I cannot grasp.

I suppose it all depends on where you start. The blankest page is one of anarchy, a situation in which there is no government and, therefore, nothing we would describe as law. Onto that blank page we put a system of government or, to be more precise, we put a system of law. The most basic effect of any system of law is prohibition of particular activities accompanied by sanctions for breaking the prohibition. Every prohibition that impinges on economic activity results in people either gaining or losing money compared to how things would be in the absence of the prohibition. I can illustrate what I mean with a simple example.

Two factories make motor cars. A law is brought in requiring all new cars to meet a particular standard of robustness in the event of a head-on collision. Factory A's cars meet that standard but Factory B's cars do not and it would cost so much to redesign them that Factory B is no longer viable. Factory B closes and Factory A makes additional sales as a direct result of Factory B no longer being a rival. As I understand it, the theory says Factory A benefits from "privately collected taxes" because it makes additional income because of the new law - that law gives an economic advantage and this advantage is said to be a "privately collected tax".

I fail to see this as privately collected tax. To my mind it is an economic consequence of a law but it is not a tax unless you adopt a highly artificial definition of tax.

It is hard to find an example of economic activity in the UK which is not affected by law. The costs of manufacturers and retailers are increased by the need to comply with health and safety laws. Those who are unable to comply or who can only comply at a cost that makes their business unprofitable will go to the wall. They do not go bust because of tax they go bust because of the cost of complying with the law. Those who are able to comply do not make "privately collected taxes" they make income by selling their wares within the framework of the law. All businesses that receive income by way of cheques or card payments do so only because there is a framework of law to give such payments a cash value. Businesses that deal only in cash receive valuable income only because the law recognises bank notes and coins to have value. To what extent do the laws that turn cheques, plastic payments, notes and coins into useable value represent "privately collected taxes"?

No sensible person could deny that laws allow people to make income they would not make in the absence of those laws. Indeed, I would go further and suggest that no one earning a living in this country would earn exactly the same living doing exactly the same thing without a complex framework of laws affecting the job they do and the field of business within which they operate. Identifying a single law and suggesting that it provides a benefit that should be classified as a "privately collected tax" is, in my view, to take that single law out of context. All other laws that affect the business in question will necessarily increase or decrease income or costs. Any law that increases income must be balanced against laws that increase costs.

It is no more realistic to look at those laws that lead to increased income or decreased costs as allowing the business to benefit from "privately collected taxes" than it is to say the laws that lead to decreased income or increased costs amount to "privately incurred tax rebates". And that is the heart of the matter. Once one adopts the language of tax to describe something one must adopt all the language of tax and describe every aspect of the business in the same way. If you describe economic benefits received because of a new law as "privately collected taxes" you have to have a description of losses incurred as a result of a new law. Only "privately incurred tax rebates" could fit the bill yet it is a nonsense because there is no one to pay a rebate. The reality is that some people benefit from new laws and some people suffer a detriment, but neither the benefit nor the detriment is tax in any sensible use of the word.

The PIIGS and one-sided equations

The good Dr North has been pointing out for some time that things in Europe are not all sweetness and light (for recent examples, see here and here). He observes that mass demonstrations are taking place with a degree of regularity in Spain and Greece as the little people give vent to their frustration at the economic mismanagement of their political masters. None of us knows what the outcome will be, nor whether it will be the same in both countries or, indeed, in any of the other countries teetering on the brink of government bankruptcy.

What troubles me is not that people are finally waking up and complaining, it is that they are complaining about completely the wrong thing. Their target is undoubtedly correct, politicians have left the PIIGS (Portugal, Ireland, Italy, Greece and Spain) deep in the mire through reckless economic mismanagement. Their complaint, however, appears not to be that their governments borrowed and wasted too much but that they do not want their governments to stop borrowing and wasting now that existing debts cannot be repaid. We see exactly the same delusionary behaviour in this country whenever the trades unions wheel out their usual rent-a-mob to bemoan a tiny bit of trimming from departmental budgets to find cash to pay the interest charges incurred by Gordon Brown's feckless stewardship of the Treasury.

I am not in the least bit surprised. Governments all over Europe have been winning elections for years by presenting one-sided equations that sound nice but do not stand up to even the gentlest scrutiny. These one-sided equations are the tool of every headline-grabbing initiative and are not restricted to the field of economic policy, we see them all the time in the field of health policy.

Smoking / drinking / one food / another food / too much exercise / lack of exercise / salt / lack of salt, or whatever is the scare of the day, is calculated to cost the NHS so-many hundreds of millions of pounds and must therefore be banned. The figures are always wrong, always grossly exagerrated, but that is beside the point; even if they were correct they only look at one side of the equation. Treating medical conditions which might not have arisen had the patient not been a smoker can be seen as a cost caused by smoking, there is nothing unreasonable in that as a general proposition. The problem is that the NHS does not exist in a vacuum and it is not funded in a vacuum, it is funded out of taxes and smokers pay taxes that others do not pay; shops and wholesalers make profits on which taxes are paid, workers in those businesses and in every stage of the cigarette production and distribution network pay taxes on their wages. The taxes gathered from the ciggy network grossly exceed even the most dishonestly overstated costs attributed to adverse consequences of smoking.

The same is seen in the moronic argument that "green" production of electricity will be economically beneficial because it will create new jobs. Of course it will create new jobs because no one has been so stupid before to pay people to do anything so utterly pointless, but even so the benefit of these new jobs is only one side of the equation. On the other side lies the fact that employing more people to generate the same amount of electricity means it is more expensive and that cost must be passed on through higher prices. Higher prices for electricity means higher costs for businesses and individuals. Those businesses can be tipped into insolvency causing their employees to lose their jobs and individuals who must spend an extra £100 on electricity have £100 less to spend on other things thereby depriving Mr Patel's Merrymart and Madame Fifi's Sauna and Hanky-Panky Parlour of income, resulting in shed staff and less tax being paid. No one should be surprised that studies in both France and Scotland reveal each "green" job to cause the loss of more than two other jobs.

So it is also with the bubble of economic activity arising from an unsustainable expansion of credit. Of course it means people have more money and buy more stuff which means shops and manufacturers employ more staff, make more profit and pay more tax. The government takes credit for the miracle of an ever-expanding economy. Apparent riches for all means votes for incumbents. The other side of the equation in this situation contains what groovy hep cats might term a "double-whammy".

Credit cannot go on expanding for ever, eventually you reach a point where you cannot borrow any more because even the most foolhardy lender is not prepared to advance you another penny. At that point the economic expansion arising from credit necessarily stops and in due course it must be reversed as people realise they must repay their borrowings. It doesn't necessarily happen all of a sudden although it did two years ago because banks simply stopped lending. In addition to the reduction in economic activity resulting from the wind-down of credit-based spending we have the second whammy, namely a reduction in tax receipts for the government. The additional sums received in the boom years were used to strengthen their electoral position. Were we cruel people we could suggest they used tax receipts to bribe voters, but we aren't cruel so we will instead describe the spending of this windfall of unsustainable taxes as the result of nothing more sinister than stupidity. Unfortunately the stupidity knew few bounds so the PIIGS, the UK and many other countries find themselves with government spending commitments far in excess of tax receipts.

A sober and sensible approach to the problem would recognise that governments handed out treats that could not really be afforded even when times appeared good, so now that they are far from good those treats cannot be given any more. The governments of Spain and Greece are trying to cut back a fraction of the unaffordable treats and it is this that causes discontent on the streets. The people are complaining that something they should never have had in the first place (because it could not be afforded) should be maintained despite government income being substantially lower than it was in 2009, it is utter madness. A particular difficulty arises with government spending compared to individual spending, namely that the consequences of reducing it are highly visible. A million people each spending £50 less is equivalent to government spending £50million less - the former is just a normal incident of life whereas the latter is a headline in every newspaper.

I cannot help thinking that pushing one-sided equations at their people and arguing tooth and nail that the equations in question have only one side is the root of current public disquiet in Spain and Greece. There is every sign that the people demonstrating against plans to trim government spending really believe there is only one side to the equation. In a way this should not be surprising, both countries had long periods of socialist government in which the allure of the magic money tree was all pervading - no need to worry, the government will pay for it, the government has a bottomless pit of money because it just plucks some more from the magic money tree. We should be more worried about this reason for mass demonstration than we would have to be were demonstrators complaining about overspending in the past.

Double-dip dementia

The world of modern politics is so dominated by form rather than substance that we can hardly be surprised when a piece of total nonsense becomes the benchmark for success or failure of a particular governmental policy. This week we have seen the threat of a return to recession dominating the feeble sparrings of the frontbenches in the House of Commons. The problem with this is that recession is treated as an unmitigated ill when it is anything but because, as always, it depends on what is actually happening.

I know this is old ground but it is worth examining again what a recession is. The conventional definition is that it is two consecutive quarters in which Gross Domestic Product (GDP) declines. So, what is GDP? It is in answering this question that we see why recession cannot always be considered a bad thing. GDP can be measured in various ways but they all amount to pretty much the same thing, GDP is the amount the UK spends on goods and services within the UK plus the amount spent on investment within the UK plus the value of exports minus the value of imports. The amount spent on goods and services comprises both the amount spent by consumers and the amount spent by government. GDP is not a measure of profitability nor of sustainability - it tells us nothing about whether the amount of spending that has occurred was affordable.

To see the limit of GDP as a measure of substance it is possible to isolate one household and see what effect it has on GDP. Mr & Mrs Ordinary have take-home pay of £500 a week. They spend £400 and put £100 in a biscuit tin under the bed. They contribute £400 a week to GDP from their own spending and thereby allow the recipients of their spending to have more to spend and this adds to GDP and the recipients of that spending also spend and so it goes on. After three months they decide the biscuit tin is sufficiently full and not to save any more. The next week they spend £500. GDP has gone up. After three months they change their minds and start saving again, but only £50 a week rather than £100; they still spend £450. GDP has fallen. The next quarter they have further concerns about spending too much and cut their spending back to what it was before so they spend £400 and start stuffing a second biscuit tin. GDP has fallen again. Oh woe, we are in recession. But what is the reality? A family that could afford to spend £400 and needed to save £100 in order to provide for its future started overspending, then they reduced their spending again in instalments to get themselves back on an even track. The reality is that the rise in GDP caused by spending more than they could afford was an illusion, it should never have happened and if it had not happened there would have been no wailing and gnashing of teeth. As it is, panic has set-in simply because spending that could not be afforded has been removed from the system. In fact there should be a sigh of relief rather than panic. At the start and end of the exercise they spend what they can afford, in between they overspend. The problem is not the return to affordability, the problem is the unaffordable splurge between the start and the end.

The position gets even more absurd if Mr & Mrs Ordinary borrow £100 a week while they are spending all their income so that they spend £600 a week on an income of £500 a week. GDP goes up even further and it falls even further when they come to their senses and decide to live within their means. In this situation there has been a GDP bubble - like every bubble it is full of nothing but air, there is no substance to it. Deflating the bubble reduced GDP and we should say "about bloody time too".

Similarly, because GDP includes government spending on goods and services, all unaffordable spending by government boosts GDP. In particular, spending borrowed money on goods and services boosts GDP. Spending money they have gleaned in tax will always be pretty much neutral in terms of GDP because if not taken in tax it is likely to have been spent by the taxpayers (of course some could be saved, but that which would be spent would undoubtedly be spent better than government spends it).

Government could borrow £10billion a year and spend it on two gangs of workers - one gang to dig holes in the morning and another to fill them in again in the afternoon. This pointless activitiy boosts GDP because it leads to more money sloshing around the economy but it is utterly pointless in any other respect. Were the exercise to end GDP would fall; again it should elicit a sigh of relief. As things are we don't yet have gangs digging and filling holes, but we have the modern politically-correct equivalent in an army of public sector naggers, snooper, counsellors, fake charities and form-fillers who are not necessary, provide little if any benefit and yet are retained and paid for from borrowed money. What does that additional GDP mean? It means no more than the additional GDP derived from Mr & Mrs Ordinary spending borrowed money, it is bubble GDP and tells us nothing about the state of the economy as a whole. Remove it over a couple of years and we could find ourselves in the longest and deepest recession in history, a situation that would bode extremely well for the future because the future would not include the wasteful and unnecessary expenditure that boosted GDP artificially.

"Artificially" really is at the heart of the matter. GDP is boosted by government borrowing to fund pointless activities that achieve nothing other than to boost GDP. If you look only at GDP you can be fooled into an illusion of perpetual motion. Borrowed money can increase GDP therefore we must borrow more and more. Nonsense. It omits the other side of the equation which is that borrowed money must be repaid and commands interest in the meantime. If you pay 5% on the borrowed money the benefit of spending the borrowed money must be more than 5% to make the exercise worthwhile. Even a benefit that can be measured as 5% of the borrowed money only allows you to stand still, it does not repay a penny of the capital sum borrowed. That there is an increase of GDP is irrelevant because it only looks at one side of the equation, it does not take into account the cost of borrowing the money. It fails to acknowledge the broken window fallacy.

We shouldn't fuss about whether GDP is up or down this quarter or the next, it really doesn't matter. What matters is that money is used wisely because the unwise use of money eventually results in retrenchment if not bankruptcy. A decade of it being used unwisely can thrust GDP into the stratosphere but that tells us nothing about the health of the economy. GDP was never higher than before the recent recession started yet the economy (to be more accurate the government's finances) was in a complete mess. That recession has not yet ended.

Of course it has ended according to the artificial measure called GDP and we might re-enter recession according to the artificial measure called GDP, but the reality is that we still have government overspending by about £160billion a year and we will be in recession until the resultant debt is eliminated. We will be in recession because ordinary people will continue doing what they are doing now, namely paying-down debt and putting aside some money for fear of unemployment, rising taxes and rising fuel bills. All they are doing is returning their own economies to a sound state. If GDP plunges but people are in charge of their finances rather than their finances being in charge of them the country will be in better shape.

LVT - a cart and horse inverse juxtaposition?

Perhaps the greatest mystery about Land Value Tax is the absolute certainty with which those who support it voice the benefits that will accrue. Land prices will fall and then be kept stable, the cost to business of employing staff will be reduced thereby leading to greater employment, there will be no speculative expectation pressure on land prices, malaria will be no more and England will win the World Cup until the end of time, and so the list goes on.

In my last missive I asked how LVT will cause or contribute to a fall and then stabilisation of land prices and received some jolly interesting comments, none of which made a case I find in the least bit persuasive. A number of points made deserve a more detailed answer than comments allow, so I'll do my best to explain my continued puzzlement.

The first puzzle is: how does LVT cause prices to fall? One way this question can be addressed is by asking whether LVT would have prevented the house-price bubble engineered by Gordon Brown from about 2000 onwards. My first line of enquiry must be to ask what actually caused the bubble and then to ask whether LVT would have negated that cause. My view, which I have stated before at tedious length, is that the bubble is exclusively (or almost exclusively) the result of lenders advancing unaffordable loans, a state of affairs encouraged by the government despite the knock-on effect it had on the value of the lenders' assets. The entire state of tits-uppedness in which many banks and other lending institutions found themselves a couple of years ago (and still but they don't mention it now) was the result of making bad investments - specifically, making bad loans to prospective house purchasers. Although it is to state the bleeding obvious, if Mr & Mrs Ordinary suddenly find they can borrow £200,000 rather than £150,000 there is more money chasing the same goods and prices rise. Value doesn't rise, but prices do. We saw exactly the same thing happen in the mid and late 1980s (although it didn't cause a banking crisis because securitisation and credit default swaps did not get out of hand). How was the crisis solved in 1989? Simple, by letting the market adjust naturally. Borrowing became more expensive sbecause interest rates were set to a level that was appropriate to risk so that good loans paid for bad loans and, in consequence, prices fell dramatically. LVT didn't cause prices to fall because there was no LVT. What deflated the bubble was to withdraw the very hot air that inflated it in the first place. Would LVT have prevented "liar loans"? Will LVT remove that hot air from the current bubble? I don't see how it could or can unless it is set at such a high level that people can no longer afford to pay both their mortgage and their LVT.

And that is the core difficulty I have with the argument that LVT will cause prices to fall. Because LVT is recycled through the Citizen's Dividend it can only ever increase the cost of housing by less than the additional tax charged, because part is repaid to the taxpayers themselves through the Dividend. What level of LVT is sufficiently high to cause prices to fall below current levels? No one seems able to tell me. To my mind it is a false argument. To reduce a bubble you have to look at how the hot air got into the balloon and address that, seeking to deflate it by reference to something else entirely might work but it can only do so circuitously and will, inevitably, have other consequences that might or might not be beneficial.

It is then said that LVT will keep prices stable. How it will achieve this is the second puzzle. One argument is that it will remove the prospect of speculative profit and that this will mean people won't pay over-the-odds now in order to secure a windfall gain later, but this assumes the very stability it seeks to cause. In other words it is a consequence of stability and a factor that maintains stability but it cannot be a cause of stability, so how does LVT cause that stability in the first place?

There can only be one answer because only one factor can prevent price bubbles, namely the dampening of demand. That can happen in a number of ways. You can increase supply of housing to reduce the price pressure on each individual property, you can limit the amount potential purchasers can borrow or you can reduce the income of purchasers so that they can only afford to service a smaller loan. What is unavoidable is that LVT can affect only the third of these factors and it can only do so by being set at a rate which is more expensive to the landowner than the aggregate of the amount he saves through the abolition of taxes on his income and the amount he receives by way of Citizen's Dividend.

A marginal increase won't have any more effect than increases in other bills, a few quid or even a few hundred quid a year won't necessarily do it, people adjust because they save on matters they consider less important. For existing homeowners it will be an inconvenience like recent rises in prices for food, electricity and gas. They are not suggested by anyone to have had any significant effect on house prices, so why should a tax unless it really bites into their income? And it is not enough that it makes life more expensive for existing homeowners, it must be sufficiently expensive to deter potential purchasers from paying what they otherwise might be prepared to pay. So, how high would it have to be? I have no idea but it is, I think, reasonable to suggest that it would be so much that the whole thing would be politically impossible to implement.

Warning to those of a delicate disposition - the following paragraph appears to be nonsense from beginning to end and has been retained to remind me to read what I write before hitting the "publish post" button.
My puzzlement doesn't end there. The whole exercise assumes a transfer of money from landowners to non-landowners because of the Citizen's Dividend that stands alongside LVT to prevent the government making a windfall gain. The non-landowners receive a double benefit. They no longer pay Income Tax, National Insurance or VAT and they receive the Citizen's Dividend that increases as the take from LVT increases. One would think the natural result of them having so much more in their pockets and of their landlords being hit by LVT is that their rent would go up. Assuming that to be the case the acquisition of houses and flats to rent would appear to be an even more attractive business than it is now. There's no income tax to pay and your customers suddenly have many thousands of pounds a year more in their pockets, it sounds like a wonderful arrangement for landlords; all the more so because Capital Gains Tax is to be abolished too. They only need to raise rents by the difference between existing taxes and LVT and they are quids in, after all their tenants will be in profit by a lot more than that. And the effect on property prices? It hardly sounds like a downward pressure to me.

Much more puzzles me, but that's enough for today.

Some observations on LVT

As a dedicated reader of the meanderings of my friend Gerard I have become familiar with some of his views on tax. In particular, I am aware that he believes it desireable to abolish Income Tax, Value Added Tax, National Insurance, Capital Gains Tax, Inheritance Tax and others and replace them with a Land Value Tax. His position is perhaps explained most clearly here.

The central principle seems to be that tax will be levied at so-many percent a year on the value of land (the value being assessed by reference to sale prices actually achieved in the area). Numerous alleged benefits of Land Value Tax (LVT) have been identified in the many posts Mr Wadsworth has made on the subject (collected here), including that LVT will contribute to the prevention of future land price bubbles and that it will not be as damaging to enterprise as the existing tax regime. I have long had reservations about both these claims, so I thought I'd say why.

Take LVT as a contributor to preventing price bubbles. The obvious first question to ask is how it will have this effect. And the obvious answer is that it will make it undesireable for prices to rise because any rise will cost landowners more in tax. To an extent it is hard to dispute this, but I cannot see how it goes very far.

Does it put any pressure on government to adopt policies that encourage stability or even a fall in land values? No, it does exactly the opposite. If land values fall so do LVT receipts and no government has ever seemed keen on reducing its tax revenues. Whereas a rise in land values will boost the Treasury coffers. On the face of it one would expect government to encourage a rise in land values.

Of course there is another side to this. A general rise in prices leads to a rise in LVT which everyone will have to pay either because they are landowners or because they rent from landowners who have to increase rents in order to cover their extra costs. When everyone is being screwed for more tax simply for the privilege of living in the same place they lived in for a lower cost last year, we can reasonably expect more than a few to cough a polite "ahem" and question the fairness of this windfall accruing to the Treasury. Perhaps the most obvious result will be the need for regular reductions in the percentage in order to keep the overall tax-take roughly the same; yet we can be confident that any such reduction will involve an element of drag so that more tax is taken year-by-year but not quite as much as it would be without a reduction in percentage.

Whether or not that is a correct inference to draw, how could LVT cause or contribute to a fall in land prices? The only way, it seems to me, is for LVT to be so expensive that it makes a significant difference to how much people are prepared to pay for any particular property. At the moment I think it reasonable to suggest that the main factor affecting how much people are prepared to spend on housing is the cost of servicing the loan they take out to buy somewhere. If they think ahead they would be well-advised to build-in a margin for the risk of interest rates rising in the future but in any event they will look at their finances and say "we can afford £20,000 a year", or whatever figure is appropriate to their circumstances. The wise ones will also take into account likely running costs including costs of insurance, repairs and utilities, so their thinking might actually be "we can afford £25,000 for housing, comprising £5,000 for running costs and £20,000 for paying for the place". The matter that determines how much they are prepred to pay is how much they can borrow in return for repayments of £20,000 a year. For sake of example, let's assume they can borrow £300,000. They do not approach the issue by saying "this house costs £300,000, how will we pay for it" but by saying "we can pay £300,000, what can we get for that sum?"

For LVT to have any appeciable effect on prices it must affect the amount people can afford to borrow. LVT can affect how much people can afford to borrow in one way only, and that is as a running cost that forms part of the overall household budget. Using the example I have just given, those with £25,000 to pay for housing would alter their analysis to something like: "we can afford £25,000 for housing, £5,000 will be needed for running costs, something for LVT and the balance to pay towards a loan". If the amount left to repay the loan is less than £20,000 that is fair enough, LVT could reduce prices. But, by definition, those very people are no longer paying Income Tax, NI or VAT, so their disposable income has increased. Say they paid £10,000 in IT & NI and £2,000 in VAT. Instead of starting with £25,000 to pay for housing they now have £37,000. So LVT would have to exceed the cost of the taxes it replaces (£12,000 in my example) for it to be able to make any difference at all.

The exact figures do not matter for this purpose. What does matter is that LVT will have to take more from household incomes than the taxes that are to be abolished for it to be able to have any effect on purchase prices at all. That is why I said it would have to be expensive. In order to have an appreciable effect it would have to be very expensive. In my example it would have to exceed £12,000 a year on a property costing £300,000. That is only 4%, so would 5% be enough, 7%, 10%? Whatever figure is chosen above 4% would provide the Treasury with a phenomenal windfall before any influence on prices fed through.

As to it not being as bad for enterprise as existing taxes, I am, again, unconvinced. The most stifling factor on enterprise is cost. Whether that cost is tax, wages, materials or fuel, the more expensive it is to start a new business or expand an existing business the less likely it is that the start or expansion will happen. VAT, Income Tax and National Insurance Contributions are the most stifling taxes because the first forces a business to make a profit just to break even and the other two increase the cost of hiring staff. Were all three abolished, enterprise would undoubtedly be rewarded ... or would it?

Abolishing Income Tax raises a particular problem because salaries are agreed gross not net. Someone on a headline salary of £30,000 is entitled to £30,000 from his employer whether or not part of that sum is paid to the Treasury as Income Tax. Get rid of Income Tax and employees' NI Contributions (which are also deducted from gross wages) and on the face of it, the employee would still be entitled to £30,000, there would be no saving to the employer. Employers' NI Contributions would be a saving, as would VAT. In their place would come LVT on the employer's premises. Who is to say whether this would be more or less than the saving in VAT and NI? I see no reason why substituting one tax on an employer for another should necessarily reduce his overall costs of doing business.

Maybe it will, maybe it won't, but unless the total tax take is reduced all that can ever happen is that the burden of tax is shifted onto someone else. Perhaps the victims will be landowners generally, both domestic and commercial, but it seems to me to be little more than guesswork (or perhaps nothing more than guesswork) to suggest that LVT will reduce business costs to any significant extent. It cannot be ignored that any sizeable increase in the cost of living of employees accompanied by a reduction in costs of employers will lead to calls for higher wages to return the balance to what it was before. And it is hard to resist the inference that employers would accede to those calls, at least in part, either voluntarily or after facing a revolt from the shop floor.

In this regard there is a difference between employees being hit by higher taxes from the government and employees being taxed more in order to make things cheaper for their bosses. In the former case the boss has an answer: "I've got no extra money, sorry" whereas in the latter it is necessarily the case that that excuse does not arise.

Once LVT has come into effect and the running costs of a household are increased accordingly it is unavoidable that some will not be able to increase their incomes and will find their homes unaffordable out of current income. The only answer given by LVT-ists is that such people will have to trade down to something they can afford, whether it be a cheaper rented place or a cheaper owned place. In itself that raises a serious policy issue. Is it right that taxation policy should force people to move from a home they could previously afford? This is illustrated most acutely by those on modest incomes who own a "high-value" property. The existing tax arrangements allow them to retain their home whereas LVT makes it unaffordable so they are forced to sell and move to something cheaper.

The usual justification given is that these people are not putting the land they occupy to efficient use and the benefit accruing from it being freed for more efficient use outweighs, as a matter of public good, the cost and inconvenience to the displaced individuals. I find this a most unattractive argument. In many parts of London and the South East the supposed justification cannot be assumed to be correct in fact. Even small properties command prices existing occupiers / owners could not afford were they buying a home today. Forcing out existing residents of one or two bedroomed flats and houses will not lead to the properties being used more efficiently, it will result in them being used by pretty much the same number of people but the new occupants will just happen to have higher disposable incomes than their predecessors.

Even where a couple moves out of their three-bedroomed home to something smaller in an area they might or might not know in order to allow one or two additional people to occupy their old house, the more efficient use of their former home hardly justifies the eviction. The occupation of land is not just an economic exercise; sentiment, including family history, are important aspects of life. People have a reasonable expectation, entirely separate from any windfall capital gain that will accrue on sale, that public policy will not render unaffordable the home they own. Of course they could remain in those homes and pay LVT out of capital by allowing their LVT liability to be charged against their home and redeemed when they sell or die. It is arguable that their homes are actually affordable on this basis because LVT simply sucks-up the equity they have acquired (but not earned) while house prices have soared. It is still a most unattractive policy to my mind because it then places these people in debt when they have arranged their affairs specifically to avoid debt. That the debt is to be paid out of a profit they have not earned is no answer except in an accountant's ledger. If you want to divest them of unearned profits wait until they are dead and apply Capital Gains Tax, don't worry them while they are alive.

What, I wonder, will be the position once LVT is in place and all those with homes they cannot afford have been forced to move to something they can afford. It is when we look at that position that we see the essential circularity of reasoning that underlies and undermines LVT. Where will people live? Answer: in homes they can afford. What is affordable? Answer: that which you can pay for out of income or by reducing your capital. What will be the most common form of affordability? Answer: paying out of income. No doubt some would choose to stay put and diminish capital for the privilege of remaining in the home they occupied since long before LVT moved the goal posts, I would suggest it is reasonable to infer that the vast majority will pay for their housing (including LVT) out of income. The inescapable conclusion is that LVT will be linked directly to income in the vast majority of cases. So, a tax brought in to prevent taxes being based on income (because that is potentially damaging to enterprise) will itself be based on income a few years down the line. And at every stage of the adjustment from current taxes to LVT the government will trim things so as to increase the total tax-take - I mean any government of any political hue.

Economic structure is more important than detail

Now that some tentative first steps have been taken on the long path to reducing government spending to affordable levels it is worth asking whether the forecasts included in the Budget papers are as important as the shift of emphasis away from big government. I don't mean the "structural deficit" because that is just a way of describing part of the shortfall between spending and income. I mean the general ethos of reducing the influence of government in people's lives and, therefore, reducing the cost of government.

What is it that those who bail-out bankrupt governments require? One thing first - reduced government spending. Other conditions apply in most cases, but that is and always will be the first requirement. No individual, company, council, state or nation can stay solvent if it spends more than it can afford to repay. Our Keynesian friends babble on about the knock-on effects of reduced spending and argue that cuts now result in the loss of later gains that their spending choices would deliver.

How can the International Monetary Fund and the European Central Bank require spending to be cut hard and quickly if the effect of doing so is to make the borrower country less able to repay the loan? Yet they do impose that requirement whenever they lend to a western government. It is sheer madness according to the ex-Chancellor Mr Darling and now according to the current US President, Mr Obama, who has encouraged European governments to continue trying to stoke-up consumer demand. Both sides cannot be right. It cannot even sensibly be said that they are addressing different issues because the lenders need to be repaid over time and any step taken now that limits the chance of being repaid next year is not one they would be wise to encourage.

I wonder whether the key to understanding the apparent conflict lies not in economics but in politics. It is good politics to be able to boast of economic growth. We saw that first-hand in the UK as the housing price bubble delivered votes for the Labour government because it made people feel wealthier and allowed them to borrow and spend against their new-found wealth. For very obvious reasons the government claimed credit for that feel-good factor and, when the level of unaffordable debt was exposed, distanced itself from the other side of the bubble coin. So far the new government has not taken any steps to deflate the house price bubble because they know it could lose votes.

Interestingly, under John Major's government house prices fell hugely between 1989 and about 1991 and then flat-lined for a few years. During that period came the general election of 1992 and little evidence appeared that deflation of the house price bubble cost the government any substantial number of votes. I didn't hear anyone blaming the government for the nominal value of their house falling by more than half because they knew it had jumped artificially and very quickly in the previous few years. As an example, some friends of mine had their house valued at £375,000 in 1989 and at £150,000 in 1992, they had bought for about £120,000 in 1986. In a six-year period it had risen in value by 25%, an average of more than 4% a year which wasn't all that far away from general inflation. The huge spike was not real and people knew it was not real. The recent huge spike is not real and people know it is not real but the game has changed somewhat because far more people have borrowed against the bubble equity. Now bursting that bubble would raise fears that didn't arise to the same extent eighteen or so years ago.

Not only do people feel wealthier if they are told the "value" of their home has increased, they also feel the country is wealthier if GDP rises. There is no counterbalancing factor of the type evidenced by perceptions of the false spike of house prices in the late 1980s, yet the situation is the same. Why did GDP rise constantly through the 2000s? Of course numerous factors applied but one was the increased economic activity caused by borrowing money we could not afford to repay. Every time quarterly figures appear and inform us that GDP has risen by 2.7% is seems to be treated as setting a new lower benchmark for the acceptable level of economic activity in the country. We have achieved a level of activity and will suffer if that level of activity falls, or so goes the theory. It is as artificial as my friends' house going up in "value" from £120,000 to £375,000 because it has foundations of sand.

To Mr Obama and Mr Darling the maintenance of a falsely inflated GDP figure is an end in itself, presumably because of the possible political consequences of the figure falling. They cannot want to maintain that false and unaffordable level of GDP for reasons of economics because the price of continuing to spend more than you can afford is serious long-term penury. The lenders and the governments of European countries seem to take the view that it is time to stop pretending that unaffordable consumer debt should be replaced by unaffordable government debt simply to maintain a level of economic activity that is necessarily dependent on unaffordable debt.

It really doesn't matter if this approach leads to a fall-back into recession because the substance of the matter will be that the economy shrinks to the size we can afford rather than being kept at a size we cannot afford. At the moment the structure is wrong. Getting the structure right is the only way of ensuring both stability and affordability in the future. To my mind it is far more important than the technical detail of whether GDP is going up, down, in, out or shaking it all about. If our current government had the courage to include deflation of the housing bubble in its plan we could get there much quicker. It doesn't matter whether their predictions are accurate, what matters is that the balance of the economy - the structure - is sustainable. They could be billions out in their predictions of borrowing and spending levels a couple of years down the line, but that will not concern those on whom they rely to fund our broken economy while the costs of Gordon Brown's decade of incompetence are wrung out bit by bit.

While throwing these words together I noticed that the good Mr Economicus has written on the same subject in far more erudite terms, he is always worth a read (his marvelous piece on the illusion of GDP should be branded into the wallpaper at the Treasury).

Should VAT rise?

When government has been spending more than it has received it faces the obvious choice of spending less or increasing its revenue. There is much mumbling about tomorrow's budget containing an increase in the rate of VAT - perhaps by increasing the rate from 17.5% or by making VAT chargeable on items currently exempt such as food or by introducing variable rates to that some items are charged at a higher rate.

VAT is a curious tax because it operates in different ways in different situations.

Take a manufacturer of chairs. He buys raw materials costing £100 plus VAT. He is registered for VAT so he can reclaim the VAT he pays on those materials, they actually cost him £100. It costs him £70 to turn those materials into a chair. So it costs him £170 to make a chair. One might think he could sell the chair for £190 and make a profit of £20, but not so because he must charge VAT at 17.5%. If he sold at £190 that would comprise £161.70 plus VAT of £28.30 (£28.30 being 17.5% of £161.70). In order to cover his costs he must sell for at least £199.75. As the good Mr Wadsworth has pointed out, in this situation VAT is a cost to business rather than a sales tax.

On the other hand, take a lawyer. He charges £100 an hour plus VAT. His customer is billed £117.50 for every hour. A customer who is registered for VAT and incurs the charge in the course of his business can reclaim the VAT, so he actually pays £100 an hour. Mr Ordinary who wants advice about his neighbour's intrusive hedge (a quality my hedge no longer has) must pay £117.50 an hour and cannot reclaim the VAT. Different customers are paying different amounts for the same thing although the lawyer receives the same amount.

In practice work done for commercial clients often incurs a higher charging rate. One reason for this is that those who can claim back the VAT can be charged more yet still end up paying less than Mr Ordinary. For example, charging £115 an hour plus VAT costs the client £115 an hour because he gets the tax back. The real winner is the lawyer, a win he would not be able to secure if it weren't for VAT.

Then take the effect of VAT on those with fixed spending power. Mr Average has £100 a week to spend after council tax. He must buy food, electricity, gas, water, transport, clothes, furniture and appliances for his home and everything else he might want out of £100 a week. In his mind all potential expenditure is graded according to importance. If food goes up he might opt for cheaper baked beans but he must still eat, there is only so much he can do to reduce his food bill. So also with electricity gas and water, he might be able to reduce consumption but that can only be done to a certain extent. If the prices of these items go up because of additional VAT the suppliers might be able to absorb some of the additional cost (thereby reducing profit margins and tax receipts, as per the manufacturer of chairs) but they can only absorb so much. Mr Average will find his spending power eroded and it is inevitable that the items dropped from his list of desires will be items that are subject to VAT. The new telly waits until next year, the holiday at the Happy Camper Caravan Boutique is not taken, old trousers are mended not replaced.

There might be a slight increase in tax revenues (at the cost of Mr Average's standard of living falling) but only to the extent that he pays more in VAT out of his £100 than he would otherwise have done. It is not a one-way street, however, because he has to forgo things he would otherwise have bought and on which he would have paid VAT and on which the recipient of his cash would have paid tax. To take a simple illustration, say £70 out of his £100 was previously spent on VAT-able purchases (meaning, in effect, he spent £30 on non-VAT-able food). Out of that £70 of spending the VAT is £10.43, so he paid £10.43 in tax and £89.57 on goodies. Increase the range of foods on which VAT is charged and increase the rate so that £80 is spent on VAT-able items and the rate is 20% not 17.5% and he pays £13.33 in tax. He also has £13.33 less to spend. At the old VAT rate of 17.5% that sum of £13.33 would have generated £1.98 in VAT, so the revenue gains £2.90 (£13.33 - £10.43) but loses £1.98, a nett gain of 92p and it loses income or corporation taxes on the £13.33 he no longer spends at Mr Patel's Merry Mart.

Increasing VAT for Mr Average is hardly worthwhile and might actually lose tax revenue. Where an increase will be effective in raising revenue is in forcing people with some spare cash to divert some that would otherwise be saved in order to protect their standard of living. Mr Above-Average might have £120 a week to spend but be in the habit of saving £20. His spending habits are the same as Mr Average but, on the figures I have used above, he can afford to spend an extra £13.33 a week (or part thereof) to keep his standard of living roughly the same.

And then there is the black economy, that mysterious part of the turnover of builders, plumbers, electricians and the like who are always extremely busy but never disclose sufficient turnover to make them register for VAT. Saving £35 on a £200 job by using Dave Dodgy rather than Colin Clean turns into a saving of £40 if VAT rises to 20%, many a Colin might then find himself tempted to join Dave on the wrong side of the fence to retain business, thereby losing the Treasury all the VAT he previously generated.

As a generator of tax revenue VAT relies on chair manufacturers being able to sell their goods at a substantial profit, on consumers maintaining their spending and eating into reserves (or borrowing) and on businesses not keeping money off the books. The higher the VAT rate, the greater the price of a chair must be to break even, the more consumers must eat into reserves (or borrow) and the greater the temptation for businesses to hide their turnover (there are legitimate ways of doing this). It might result in a boost of revenue but the price is a high one because of the consequences to the Treasury and to the economy as a whole of these three factors.

Cuts for the long term

It has been interesting to read the reaction of ministers under the previous government to the news that government spending is to be cut hard as soon as possible. Their position is being led by the former Chancellor Alistair Darling. His argument now, as during the recent election campaign, is that government expenditure must be maintained to keep sales churning and should only be reduced when the economy is producing more so that private sector demand is already in place to take over and fuel consumerism when government demand is reduced.

More interesting has been the position taken by the IMF and the European Central Bank in relation to the collapsing Euro-zone economies, a position echoed belatedly by one former minister in the last government. They are all citing the structure of an economy as being more important than transient issues such as this year's level of consumer demand. Yet again my mind goes back to 1976 when the previous Labour government had to beg a massive cash injection from the IMF in order to be able to pay its bills. Among the conditions attached to the IMF loan was a requirement to reduce government spending. Among the conditions attached to the bail-out of bankrupt Greece is a requirement to reduce government expenditure. Among the criticisms of his former colleagues made by ex-minister Lord Myners is their failure to recognise the need to reduce government expenditure.

Mr Darling's argument looks only at the short term. In a way that is understandable. Politicians are scared of some words, one of which is recession. If you can avoid, delay, soften or end recession any path that achieved that end is attractive to those whose careers depend on recession being avoided, delayed, softened or ended. The problem is that it looks at the wrong measure. Recession is, of itself, a pretty meaningless concept. What does it matter if Gross Domestic Product falls by 1% for two consecutive quarters? Why is that awful whereas one quarter's fall of 2% is ok provided the next quarter does not also decline? The answer does not lie in the magic word "recession" it lies in the causes of a sustained fall in economic activity. That there is a sustained fall is consistent with there being an underlying fault but it is not proof that any such fault exists, so recession of itself proves nothing. Similarly a consistent rise in economic activity does not prove that the economy is healthy because the rise might be caused by an unsustainable bubble of credit, as we have seen recently.

The long-term health of a national economy can only be assessed by looking at the overall structure of things and judging whether it is affordable in the long term. In this exercise both the quantity and quality of government expenditure figure large because government takes such an enormous share of national income. Importantly, it is necessary to look at both quantity and quality of government spending because they each have a significant impact albeit in different ways.

The quality issue is being addressed by such matters as ditching pointless quangos and other non-jobs that achieve nothing other than consuming tax revenue. It is also being addressed by trying to ensure that areas of government that do provide some benefit deliver a far larger bang-per-buck. These are not matters that can be addressed easily by international lenders because they are very case-specific and, in some instances, politically sensitive.

The quantity of government spending is a different matter. It affects the whole of the national economy drastically. Every penny government spends must come from one of three tranches of income - yesterday's tax, today's tax or tomorrow's tax. When some emergency arrives that requires exceptional government spending it can use savings made out of yesterday's tax (don't laugh, I'm talking theoretically here). If that is not enough it can channel some of today's tax into the pot and if that is still not enough it can borrow and then repay that borrowing from tomorrow's tax. None of it comes for free. Once the situation is reached of ordinary day-to-day government spending (as opposed to exceptional costs associated with, for example, essential military conflict) requiring borrowing against tomorrow's tax for year after year, you have an obvious structural problem.

Economic growth and its resultant larger tax-take can address that problem to a degree but only to a degree. As the private sector earns more there are entirely reasonable pressures for public sector salaries also to increase, thereby absorbing much of the increased tax revenue and limiting the ability of economic growth to make a significant dent in government debt. There is also the political temptation to spend increased receipts on new pet projects to buy votes at the next election. To pretend, as Mr Darling does, that it is good value to borrow at 4% to maintain aggregate demand that currently produces a 0.1% growth in GDP is to ignore three essential facts.

First, the cost is out of all proportion to the benefit. Secondly, demand is only of a long-term benefit if it results from increased wealth-production rather than from borrowing today to shore-up a standard of living you cannot afford tomorrow. Thirdly, borrowing today means interest payments tomorrow, thereby reducing the amount you would otherwise be able to spend tomorrow and, by definition, reducing tomorrow's demand. So, if you borrow today to support today's demand you do it by reducing tomorrow's demand. Unless, of course, the way you spend it today leads to greater wealth and an increase in tomorrow's demand above what it would otherwise be - something that no government in history has been able to achieve.

No international lender can descend into the minutiae of a particular borrower's economy and seek to identify individual items that will affect the overall long-term sustainability of the whole economy. What can be done is to look at the quantity of government spending, assess the long-term cost if it is maintained and say "sorry chaps, you can't afford to spend that much, I will lend provided you spend less." He is not bothered about maintaining demand this year, he is looking to the overall structure and knows that whatever the level of overall demand in the domestic economy excessive government spending will not be affordable.

If Mr Darling were right the international lenders would not be imposing any conditions on the loans they make. They would want government spending to remain as it is or even increase, they would say "spend more and boost demand, that will increase wealth". Yet they don't say that because they know it is nonsense. They know they will receive interest and the repayment of the capital sum they advance now (and the sums they might be asked to advance in the future) only if governments live within their means.

What matters is not the position this quarter or next or even the position this time next year. What matters is whether a national economy is sufficiently well-balanced to pay for itself (and thereby allow its people to enjoy the fruits of their labour) in the long term. If it is not, those who are asked to bail it out with loans will want an extra return on their money to reflect the risk of default. The institutions that lend to governments comprise other governments as well as private finance bodies, and none of these can afford to forgo interest or capital repayments. Nor do they particularly want to receive a very high return because high interest payable on government debt carries the threat of losing absolutely vast sums if default occurs. Of course they are happy to receive big profits while default is avoided but they know the best long-term investments are those that accumulate steadily not those that can make or lose a fortune over a short period.

It really does not matter if the UK slips back into recession - on any definition it is hardly out of recession anyway. What really matters is that the effect of government on economic activity is not so detrimental that the the nation cannot pay for itself. Once it slips over the edge and cannot pay for itself that imbalance must be dealt with before worrying about anything else. Maybe it will cause the loss of some jobs and a decline in overall spending power this year and next, but that merely reflects that pre-existing levels of both employment in the public sector and consumer demand could not be afforded.

Tax still matters to ordinary people

The single most significant policy announcement in British politics over the last three years was a call to reduce tax. Overnight the opinion polls delivered a substantial Conservative lead from a position of virtual stalemate. The announcement was, of course, the proposal to increase the threshold for Inheritance Tax to £1million.

As the formal election campaign started the first dividing line between the parties concerned a tax, National Insurance. The Conservative lead in the polls, which had been falling, appears to be increasing again after they said they would increase this tax less than Labour.

Everyone I talk to tells me they think they pay too much tax. I really do mean everyone, including businessmen engaged in cash intensive fields such as small shops and restaurants who have (and, I suspect, take) the opportunity to trouser a fair few quid out of sight of their accountants. The point made to me is always the same: "I work bloody hard and don't see why the government should take so much of my money".

There are some who add that others should pay more tax so that they should pay less but I have spoken to no one who thinks they should pay more. Were I to come across such a person I would inform them that voluntarily additional tax can be paid and ask them how much they plan to give. It is one of those wonderful damned-if-you-do-and-damned-if-you-don't questions. If they plan to give more they are damned for not having done so already, if they don't plan to give more they are damned for saying one thing and doing another. The question is not just a cute trick, it goes to the root of all arguments for more tax to be levied.

Whether that argument is put forward by an ordinary individual or a politician it is entirely legitimate to ask whether they practice what they preach. After all, what reason can they have for not volunteering additional tax if they believe the current level is too low? It seems to me there can only be two reasons.

They might argue that it is not fair that only they pay more. Were they to take that approach they would have to acknowledge that tax is a burden unmatched by a concomitant benefit. Were it beneficial there would be nothing unfair about an individual volunteering to give the Treasury an extra £1,000. It would be no different from that person volunteering to pay £1,000 to charity when his co-worker on an identical salary gives nothing. Give to charity and the least you can say is that you have done something that might benefit others, indeed there can be no other justification for doing so. They would never consider tax to be akin to charitable donations.

On the other hand they might argue that one person paying additional tax will make no difference whereas everyone paying more will provide sufficient funds for good things to result. This is a sound argument, to a point. Incidentally it is exactly the reason why any step taken to reduce the UK's carbon dioxide emissions is a complete waste of time and money. Even if human CO2 emissions are potentially harmful there is absolutely no point us doing anything about ours unless all the big players do something substantial about theirs, which they won't. That is beside the point but is worth saying anyway. Back to the point, the second reason for not volunteering additional tax rests on the presumption that more people paying more tax will have beneficial consequences.

The prospect of additional Inheritance Tax being put to good use did not prevent a policy of limiting that tax causing a surge in support for the Conservatives. I believe there are three reasons for this.

First, it is entirely natural for parents to want their children to have a more comfortable life than they lived. Leaving the material profits of your life to your children is part of that instinct and has become part of the culture of this country. Inheritance Tax does not lead to the question "why should the government take so much of my money" but a slightly different question, a question of greater emotional impact: "why should the government prevent my children getting my money?"

Secondly, whether you approve of current house prices or not the fact remains that an awful lot of people have a net worth substantially above the current IT threshold of £325,000. You can't get a one-bedroomed flat in many parts of London for £325,000. The proposed increase of the threshold to £1million is not about those with assets worth £1million or more, it is about those with assets worth between £325,000 and £1million. In many parts of the country that encompasses Mr Average. What is seen and promoted as a rich man's tax is hitting the non-rich and they don't like it.

Thirdly, it provided a first dab on the brake pedal after more than a decade of the tax accelerator being pushed ever closer to the floor. The view expressed to me in private discussions was suddenly out in the open as part of mainstream politics. People think they pay too much tax and a politician said, in relation to one tax, that he agreed they should pay less. It was an important moment because it broke the consensus in a way that accorded with the view of many voters.

Of course there are now enormous additional costs for taxpayers to bear as a result of the government spending billions of pounds it doesn't have. But that does not change the fact that people resent paying additional tax when they see no additional benefit resulting. We are not yet at the position of the people saying "we will pay this much and no more, you must cut your cloth accordingly". I can't help thinking that the effect on the opinion polls of the Conservatives' IT proposal and their position taken on National Insurance in the last week might result in that view coming to the fore.

Taking money out of the economy

Sometimes I read something so obviously upside-down that I think I must be missing the point. So it is with the result of the long weekend's thinking by the current government spin team. In a nutshell, the government plans to increase employers' National Insurance contributions whereas the opposition say they would increase them by less. The Prime Minister and Chancellor mounted a twin attack, both of them saying the Conservatives' approach would "take money out of the economy". It's so very bizarre that I have had to wrap a cold towel around my chins in order to try to make sense of it.

As a general rule it's sensible to start at the beginning, so I will. Employers' NICs are a tax payable by an employer as a penalty for having the effrontery to give someone a job in the private sector. Income tax and employees' NICs are deducted from the gross wage or salary so that the employee receives less than the headline amount they earn. Increases in these taxes do not require the employer to pay more for the same job. But employers' NICs are a tax payable by the employer in addition to the contractual wage or salary. Any increase adds to the costs of the business.

Call me a simple fellow if you will, but it seems to me that when Mr Patel has to pay extra to employ old Doris on the till that money must come from somewhere and go somewhere. We know it comes from Mr Patel because he's the mug who pays her wages. So, paying this additional tax takes money from the economy in that it reduces Mr Patel's spending power and might mean he has to satisfy himself with fewer extras when next he visits Madame Fifi's Sauna and Hanky-Panky Parlour. In the language so beloved of our Keynesian friends, it reduces aggregate demand. The other side of the coin is that the money goes to the Treasury to be spent on something, we know not what. On the face of it the reduction in spending power caused to Mr Patel is matched by an increase in spending power for the lucky recipient of his largesse. One set all, new balls please.

It follows from this that if Labour wishes to bleed Mr Patel for an extra £15 a week and the Conservatives want to take only an additional £7.50 nothing at all is lost from the economy. The same amount of cash is sloshing about except that on one proposal £15 of it sloshes at the Treasury and on the other that £15 is split equally between the Treasury and Mr Patel. You see my problem? Where is the loss?

No doubt you could invent ways in which leaving money in the private sector amounts to a loss to the UK economy, for example if it is paid as dividends to overseas investors and therefore leaves these shores (subject to such tax, if any, that they pay on it over here). There could also be a drop in aggregate demand if some of the money is saved rather than spent and, on a particularly warped view of reality, that could be said to be a loss to the economy. Again, however, that is to look at only one side. Marginal businesses can be tipped over the edge by modest increases in their staffing costs and a reduction in profits reduces the money available for investment (I mean real investment not government-speak investment). And what happens to Mr Patel's money once the government has it? We know it will be spent but also know that a lot of it will not be spent on anything that adds value. We also know that interest payments on government debt will not all stay within the UK economy.

The argument that taking less tax removes money from the economy is moronic humbug. If they were concerned about taking money from the economy they would not have racked-up hundreds of billions of pounds of debt on which interest must be paid. And if they were honest they would say "we need to take more tax because we are spending too much and we think there might be more votes in taking it from filthy capitalist pig employers than by raising taxes that the little people will feel directly."

It seems to me there is something more sinister behind this piece of spin. Taking it at face value they are saying that government spending is of net value whereas private sector spending is a net cost to the country. It is obvious nonsense and we know it is nonsense because they claim recovery from recession will be fuelled by private-sector economic growth. Nonetheless, it sets the scene and tells the lie they want the little people to believe, namely that everything government currently does is essential and beneficial and once we are over the current difficulties the government can be even more beneficial by doing even more things. There is not a hint of them looking to cut-back the number of things government does in order to balance the books and make a start on repaying the enormous debt their incompetent profligacy has created.

What is even more worrying is that the Conservatives do not seem to want to grasp this most essential nettle either. We can argue about the benefits of street football consultants, grants to the arts, five-a-day advisors and carbon footprint investigators until the cows stop farting. Perhaps there is some benefit perhaps there is not. What is certain is that these sorts of activities are fripperies, they are luxuries, they are most certainly not essential. The only way we can make any serious inroad into the annual deficit and then into the massive accumulated debt is by cutting out spending on non-essential things.

I wonder whether the heart of the problem is the seductive concept of aggregate demand. An awful lot of UK GDP depends on consumer spending. In the private sector wages and hours are being cut so that businesses can survive and one consequence of that is that the employees have less to spend and, therefore, their local shops and eateries are suffering. There is a superficial attraction in maintaining levels of public-sector pay and employment so that the detrimental effect of private-sector belt-tightening is not exacerbated by public sector employees also spending less. The attraction is only superficial because the private sector is dealing with reality whereas the public sector is seeking to avoid reality.

There is no escaping the fact, for fact it is, that we simply cannot afford all the things we enjoyed three years ago. One could say we couldn't really afford them then but that is beside the point. We did pay for them and now we can't so we have to cut them out of our budget. There is no escaping that in the private sector because there is no magic money tree - you cut costs or you go bust. If you go bust everyone loses their job so people have agreed pay deferrals or pay cuts or reduced hours or to cover a vacancy using existing staff without any additional pay because they know the short-term saving in costs might allow them to have a job next month and next year. It is a great example of the benefits of breaking union power, a task which cost lots of jobs in the 1980s. The result is that businesses which would have had to fold a generation ago can now survive. They will still have to keep their fingers crossed about what the future holds but at least they now have a future.

You can bleat as much as you like about aggregate demand but that won't keep alive a struggling business. Only cutting its costs will keep it alive. You can say "you must keep paying your people the same amount otherwise they can't spend and other businesses might fold" to which the answer is "so you want me to fold instead and guarantee that those other businesses fold too". That is the reality.

Maintaining public sector spending will mean more cash in the tills of the businesses the public sector employees frequent but it comes at a cost. That cost is the need to raise additional taxes to pay the shortfall between current tax receipts and government spending and that has an effect on future spending power which necessarily dampens future aggregate demand which, in turn, makes it all the more difficult to generate the income from which those additional taxes are paid.

I've been more than usually circuitous today, but we are now back where we started. Taking one amount rather than another in tax does not take money out of the economy. But taking money out of the private sector inevitably prevents as much wealth and money being generated as would occur if you left that money where it was. The reason for that is that only the private sector can make the stuff to replace what we consume every day. A factory making bread doesn't just pump-up aggregate demand by paying wages that are then circulated around the system, it also makes something that is needed. Take tax from the business and from its employees and you reduce their ability to spend thereby reducing aggregate demand. Pay that tax money to a five-a-day advisor and there is no change to aggregate demand because it is taken from one person who would spend and given to another who has exactly the same amount to spend. But you don't get any bread from a five-a-day advisor's work. We are worse off not better off by keeping these non-value-added jobs.

That is what the politicians should be debating because we simply cannot afford roughly a quarter of what the government currently spends and that proportion will increase as they continue to overspend and incur further interest charges.

The pain of not saving

I am pretty hopeless with money because organising money requires an ability to organise and I couldn't organise a fart in a curry house. In order to ensure I did not spend all my income on fripperies I used to open little savings policies by which I paid a certain amount in each month and could not withdraw anything for five years or more without suffering a substantial loss of interest. They are quite good for a chronically hopeless organiser because all you have to do is fill in a standing order form when you open the policy and the rest looks after itself. Even if the return is not very high, at least you have squirreled something away when you would otherwise have spent it on things you didn't need.

A curious fact about saving is that it can be utterly painless yet provide a tasty bonus when you finally get your hands on the money. Of course inflation is a factor and can mean that the lump sum you get at the end actually has less buying power than the small sums you paid in, nonetheless you still get a lump sum when otherwise you might just have bought another twenty exercise machines to add to the ten you did buy but never used.

Were you to save just £50 a month over five years and made no nominal profit at all you would receive a lump sum of £3,000. That's quite handy when you know you can't trust yourself to stick five £10 pound notes in a biscuit tin under the bed each month and leave them untouched for five years. Saving is not all about making a profit, it is also about preserving something which would otherwise be unavailable because of your disorganised character and spendthrift nature.

What applies to individuals also applies to businesses. If you own your own home you will have repair bills from time to time which could not always be met easily out of current income. Little things are not really a problem for most people, but a new roof or new windows can be, just as the need to buy a replacement washing machine or bed can put a strain on a tight budget. It's so much less painful to pay for replacements from a lump sum of savings, even if the real value of those savings has fallen 10%, than it is to stick the cost on a credit card and pay 20% or more. Businesses face the same problems. Things wear out and must be replaced, shops need to be refitted from time to time, new machinery is required to keep the business viable in a competitive world. These things all cost money and the sensible businessman makes provision for these future risks by maintaining a fund of reserves specifically to meet such costs.

It is rather different for government. There is no need for it to be different but it is because there seem to be votes in spending but not in saving. Of course government makes provision for replacing and repairing infrastructure such as roads and buildings but it does so mainly out of its annual income rather than by setting aside funds to form a pot that can be raided when the money needs to be spent. In one way this is both sensible and inevitable. Every year there are roads that require resurfacing and buildings that need replacement or refitting, so there is never a gap in which they can say "we don't need to spend it this year so we'll stick it in a biscuit tin under the bed". That is only part of the story, however, because this sort of expenditure is akin to you or me having to buy a replacement kettle or computer.

The other part of the story is that some aspects of government expenditure are, by their very nature, affordable only if funds are set aside for future use. Pensions are the most obvious example of this. It seems obvious to me that there is only one sustainable way to provide pensions for the retired. You build up a pot of money or assets during the person's working life and on retirement the pension payable must be limited to that which the pot can provide. Guaranteeing a certain level of pension payment without the pot being large enough to pay it means either taking additional money from those in work in order to subsidise those whose working life has ended or failing to honour the guarantee. That is a recipe for disaster.

There have been numerous examples of private pension funds not being big enough to pay the returns they had promised, with the result that either people who expected a certain income have received less or some have had their entitlement fixed and others have missed out entirely. The option of simply throwing more money into the pot does not exist for a private fund because it does not have the ability to force mugs to pay-in for no return. The government has millions of mugs at its disposal. It can simply divert taxes from one potential field of expenditure and put it into paying the statutory pension and guaranteed pensions to retired state employees or it can seek to raise more and more in tax to cover the cost. Neither of these courses is sustainable.

Pensions are just like shop refits or a new roof on your house. You know they will have to be paid for at some time in the future and clever people with large calculators will claim to be able to tell you how much they will cost and how much should be put aside each year to cover that likely cost. Sensible shopkeepers do not bury their heads in the sand and hope the day never arrives, nor do they expect to be able to find £40,000 lying around in the petty cash tin; they save for it, they build a pot. Sensible house owners likewise have savings because they know that one day the roof or windows will need replacement and that it will be more easily afforded from savings than from current income.

Some quite terrifying figures are in circulation about the likely future cost of pensions for government employees and equally scary figures for the cost of funding the statutory old-age pension. There is one reason and one reason only why there is no pot to pay for the statutory pension and only limited pots to pay for employees' pensions. Government took the money, by way of National Insurance contributions and deductions from their employees' earnings, and spent it on other things because they thought there would be votes in it. They didn't look to the future beyond the next opinion poll and the next election. Both parties are guilty because they have both done it.

Will either have the guts to tell the truth and say that it is necessary to put aside a substantial chunk of tax income each year to provide a pot to pay future pensions? It will be very expensive and might take a decade or more, but it needs to be done.

We must avoid the Japanese problem

Anatole Kaletsky wrote an interesting piece in the Times today highlighting the Japanese problem. In an attempt to stimulate its way out of recession in the early 1990s Japan increased government spending and borrowed to pay for it. This went on for several years and now, almost twenty years later, the cost of servicing the borrowing is so high there is no additional money available to repay the principal sums borrowed. Japan's economy has, as a result, seen virtually no growth in GDP.

In effect the "spare" money that could have fuelled growth has been used paying interest on the massive sums borrowed. There should be no surprise in this because growth comes from the bottom up it is not created by government. It comes from individuals and businesses exploiting new ideas and new processes, almost always that requires an initial injection of capital and weekly costs of production. Reduce the amount of available capital and/or add to the costs of production and even a half-wit can see that new ideas and processes will not get off the ground to the extent they could. It doesn't actually make any difference whether the factor reducing available cash is taxes or any other alternative use of the money. A business owner who takes a massive salary and spends it on expensive booze and cheap women, or cheap booze and expensive women, reduces his ability to invest in the business in just the same way that a government taking the same sum in tax reduces the ability of the frugal factory owner to expand. The difference, of course, is that the spendthrift owner can console himself with happy memories and a trip to the clap clinic.

It by no means follows that every government that borrows vast sums in a vain attempt to prop up its national economy will find itself trapped in the long term as Japan is trapped today. However, the trap will always arise if there is no political will to reduce borrowings. That is where we have a real problem in the UK. Decades of brainwashing the masses into believing government has a magic money tree combined with a decade of making as many people as possible directly dependent on the state for their ability to put food on the table, results in upwards of one third of those polled saying they plan to vote Labour in the coming election. More than that, it makes the Conservatives too scared to tell the truth about the need to slash government spending because their focus groups tell them it will be a vote loser.

Poor Gordon and the hapless Mr Darling tell us government spending should not be cut this year because it will have an adverse effect on demand and will upset prospects of recovery from recession. Occasionally they say reductions can be made from 2011 onwards, but if their current reasoning is sound it will apply until a strong recovery is underway and there is absolutely no guarantee that that will happen next year or the year after or the year after that.

The one thing that is an absolute certainty is that we either follow Japan or we pay back some or all of the borrowings. Actually something else is certain. Whether we retain the debt and pay buckets of interest or reduce the debt by paying a combination of interest and principal, the money used cannot be used for anything else. Debt is a millstone around the neck of a national economy just as it is a millstone around the neck of individuals, indeed it is a millstone around the neck of a national economy precisely because it is a millstone around the neck of individuals. That is because, in reality, there is no such thing as a national economy. There are millions of individual little economies comprising each separate business and household and the combined value of them all is what we call the national economy. It is actually no more realistic a notion than the economy of Sussex or the economy of Acacia Avenue, it is simply a statistical construct. The real economy is the millions of businesses and households.

Mr Ordinary with a disposable income of £20,000 can spend £20,000 or he can save some and spend the rest, or he can invest some in a business venture and spend the rest or he can split his money three ways with some spending some saving and some investment. Whatever he does he can only dispose of £20,000 because that is all he has. Take £3,000 from him to repay debt and his choices are the same but with an overall limit of £17,000 rather than £20,000. There are knock-on effects of his choices which operate in much the same way as fractional reserve banking. If he spends £20,000 at Mr Patel's Merrymart, Mr Patel makes £5,000 profit which he then spends at Mr Khan's Kurdish Kasbah, Mr Khan makes £1,000 profit which he spends at Madame Fifi's Sauna and Hanky Panky Parlour, in turn Madame Fifi and the girls receive money they spend elsewhere. When the amount entering Mr Patel's till falls from £20,000 to £17,000 so Mr Khan receives less and one of Madame Fifi's girls misses out on business. The national economy is depressed because the individual economies of Mr Patel, Mr Khan, Madame Fifi and Tiffany the trainee tart are depressed, as are those of all the suppliers to Mr Patel, Mr Khan and Madame Fifi.

In other words, debt depresses the economy. It also boosts the economy for so long as the principal sum borrowed is sloshing round the system. Thus, Mr Ordinary could borrow £5,000 at 10% and have £24,500 to spent at the Merrymart thereby increasing Mr Patel's profit, and Mr Khan's and Madam Fifi's and that of the manufacturers of intimate rubber items. But that can only happen once. The key question is whether the boost provided by an injection of borrowed money outweighs the depressive effect of reduced disposable income in future years.

Japan illustrates that too much borrowing can lead to a long-term depressive effect far in excess of any short-term benefit. It is a self-perpetuating problem because the only way out is to increase GDP but that requires "spare" money and there is no spare money because of the need to pay interest. There is only one way out of this spiral of stagnation, it is to reduce taxes and other costs that government imposes on business. No other course has the potential to raise GDP because GDP can only increase through profitable business activity. In the short term that might lead to a need for further government borrowing to cover the reduction in tax receipts, although that can be ameliorated by paring back government activities. Even that short-term problem is by no means a certainty because marginal businesses will become profitable instantly, already profitable businesses will become more profitable and new ventures will pay tax from their first day.

Given the choice between (i) cutting government costs and taxes now and taking my chance on it producing a quick benefit and (ii) maintaining taxes and state spending in the hope that GDP will expand to pay for it, I would go for the first option every time. It involves uncertainty but to that I say "so what?" Just look at the track record of private business for expanding, creating jobs and making taxable profits. You don't need to be able to identify exactly what businesses will make what profit to know that reducing overheads will make business more profitable and create new jobs. None of it will be by direction of the government, it will all be the result of government getting out of the way.

It is the only certain method of avoiding the Japanese problem.

We must shed the public sector of pointless managers

When I read a headline proclaiming an impending strike by civil servants I had no idea what it was all about. On reading the article I discovered it is all about redundancy pay. My chubby little heart was lifted by reading that five of the six trade unions representing civil servants had agreed to a change to the redundancy pay scale and only one was holding out against the plan. Under the new proposal civil servants will be entitled to far more than the statutory minimum, albeit less than their previous contractual entitlement. It looks like most of the unions have recognised the reality of an empty governmental purse.

It might be a different matter once the need to reduce government spending substantially becomes policy rather than a plan for some undefined time in the future. There are all sorts of ways one can look at the figures. I prefer a simple approach to match my lack of depth. Government spending, c£600billion; government income c£450billion; answer = reduce spending by c£150billion. There, nice and simple.

I doubt that anyone sees throwing people out of work as a good in itself save, perhaps, when the people concerned are politicians. Some of us are very keen to see every five-a-day advisor, carbon footprint assessor and street football consultants to be out of a job, but it has nothing to do with wanting to see the individuals on the dole. Instead it is all about the jobs they do. They are non-jobs, they suck money from the productive side of the economy and deliver nothing of value; they represent spending for the sake of spending. The need for redundancies is far from clear, however.

The public sector has a large turnover of staff each year. One way to reduce staffing costs without sacking anyone is to use staff currently in non-jobs to fill vacancies as they arise in the parts of the public sector which actually do something useful. This will take careful and sensitive management but there is no reason in principle why an administrative assistant in a five-a-day advisory department could not use their skills in a court office or a hospital office or a tax office when an existing member of staff leaves. Of course it is unlikely that a satisfactory position can be found for everyone working in the non-value-added areas of the government machine, but there is no reason to believe that vast numbers cannot be transferred happily from one department to another. After all, if someone leaves a court office to take a job in the private sector they are simply transferring their skills from one work place to another; there is no difference in principle between that happening and someone else moving from one government office to another.

The "natural wastage" that arises every year through retirement and resignation does not always require new people to be brought into the fold. Identifying the areas of the public sector that are mere political fripperies allows the people currently employed there to be available to fill other vacancies.

That is not to say there will not be an adverse consequence on overall levels of employment. By definition, abolishing one role and using the person who filled that role to fill a vacancy elsewhere that would otherwise have been filled by taking someone off the dole leads to one fewer person being employed overall. But given the need to save £150billion (on my simple figures) the overall number of state employees will have to fall considerably.

Transferability of state employees is almost certainly easiest where the job is not technical, particularly where it is purely administrative. The greatest risk of redundancy is probably not in the paper-pushing side of things but in wholly unnecessary management roles. The management of departments often requires knowledge and skills that are particular to that department and are not easily transferable. Where the department is a waste of space the manager cannot expect to find another position in the civil service as easily as his secretary and the army of people who deal with mundane paperwork. The time has come, however, when the pointlessness of their department must be acknowledged and they will go the way of countless people in the past who had skills and knowledge that was no longer of any use. If they can be used elsewhere, so be it. If they cannot then it must be "thank you and goodbye". I hate to think how many people are employed in these positions at salaries of £40,000 and above (plus pension, plus car plus this plus that). A huge saving is possible if only someone finds the guts to say "sorry, your job achieves nothing".

It is worth noting that almost all non-jobs have always been non-jobs. I am not talking about the modern day equivalent of the brick maker whose skills were made redundant by mechanisation of the brick-making process. I am talking about the man with the flag walking in front of early cars to warn people that a motor vehicle was approaching. That was a non-job, created out of an abundance of caution about a risk that never existed. So it is with every public sector job concerning so-called "climate change" or haranguing people about what they should or should not consume, and so it is also with the countless talking-shop Quangos including those with "Regional Development" in their title.

Such of their staff who have skills useful elsewhere should be redeployed. It will save money without causing them to lose a day's pay. A big saving will be made by disposing of the highly paid but utterly pointless managers.

I did a rough calculation earlier today. It concerned a local shop that is suffering badly despite being run extremely well. There are two owners who both work there, three other full-time staff and five part-timers. Assuming all the employees are on £7 an hour and the owners draw £30,000 each (if takings permit that much), the income tax and National Insurance produced by that business in a year is roughly £25,000. Five full-time and three part-time workers work all year to pay the cost of half a senior climate change manager.

If the unions oppose such redundancies they should be shot.

Boring is hard to sell

Perhaps it's just a reflection of my experience, but I simply don't think general life is very exciting. It has its moments, of course it does, there are spells of huge joy and deep misery. Most of it, however, is just getting on with getting on. I know I am luckier than most in that my field of work has provided variety and intellectual challenge of a type not many enjoy. When we look at the general scheme of life, though, it is not full of thrills.

If you are a politician faced with an electorate plodding through their everyday lives it's fairly obvious that promising them rewards they do not have to work for is more likely to gain their vote than telling them they shouldn't expect riches if they vote for you. This is one of the reasons socialists will always garner votes. They claim there is wealth for all if only they could be in charge and arrange things suitably. Every time they are elected they fail to deliver on that promise, and every time the next election comes around they promise the same thing while the alternative candidate does not. The promise itself is as enticing, yet as tantalising, as the rack of scratch cards on a shop counter. Faced with a choice between the idealist claiming he can make you rich and the realist saying he won't, it is hardly surprising that people vote for the former.

That they have been let down and made worse-off by the idealist every time he has gained power is neither here nor there. At least he claims to offer the chance of a lottery win. Offering bad news or "sorry chaps, it's going to be more of the same" might be factually accurate and unimpeachably honest but it is not enticing to those who see no way out of their current rut other than a fairy godmother.

The current state of the UK economy is a matter of fact. No fairy godmother will come along to change things. The recession has reduced GDP by around 6.2%. A degree of reduction was inevitable regardless of international recessionary pressures because some business was dependent on continued additional borrowing by individuals and that cannot go on for ever. Some of that borrowing was for things that were consumed immediately and had no tangible long term benefit, such as holidays. Some was for the purchase of goods to replace worn out items, perhaps furniture or a washing machine that pumped more water on the floor than through the drainpipe. Some was for the purchase of goods previously not enjoyed by the buyers, perhaps a dishwasher or a garden shredder. Some was for up-grading of items where what was already owned was perfectly serviceable but not the latest thing, such as flat tellies and fridges with two doors.

Two factors apply to limit the continuation of that trend. First, incomes dictate how much can be borrowed and once you have borrowed you have to pay interest, thereby reducing your disposable income and limiting your capacity for further borrowing. Secondly, once you have acquired a new thing, whether as a replacement, a new product or an upgrade, it will be some time before you have to spend on the same type of item again. Even in a country of 25 million households the time will come when the numbers up-grading their tellies starts to fall. Changing from a fat telly to a flat telly is a different kettle of ball park than changing from one flat telly to another.

There is probably a clever person somewhere who has calculated the overall level of person debt at which further borrowing will not be feasible, but their work has evaded my attention. The precise figure (if there is one) really doesn't matter. All that matters is that funding a certain percentage of national business on credit must have a limit. There is a limit for individuals, which is why Mr & Mrs Ordinary borrow £1,000 on a credit card to buy a flat telly plus surround-sound home cinema system and then don't borrow again until they have paid back that sum. A sudden rush of increased borrowing will boost the business of the vendors and manufacturers, but only for so long as people can afford to borrow more. One day it will slow down but the shops and distributors and manufacturers will have staffing levels to cope with the previous massive demand. A reduction in demand will mean job losses.

We now know that people borrowed more than they should because their actions tell us. They are paying-off personal debt faster than at any time in history. The reduction in demand for unnecessary replacements and up-grades is an inevitable consequence of the previous demand being a temporary and unsustainable bubble. That aspect of reduced GDP would have happened at some time regardless of other factors. Careful governments regulate the amount of consumer credit because they know that only a certain level can be sustained. But you can't easily win votes by saying "we are going to make it more difficult for you to borrow the money to buy a fridge with two doors in place of your boring old one". Perhaps it would not be a vote loser if the politicians had the courage to explain that the bursting of demand bubbles does far more damage than the benefits those bubbles delivered during their short life.

What I find utterly baffling is the apparent inability of people to equate their own financial situation with that of the government. (I infer this apparent inability from the indication from opinion polls that some people are still prepared to vote Labour) All around the country there are homes with Ma and/or Pa saying "sorry offspring, it's Margate not Marbella this year" and "no we can't get new car, we don't have the money because we are still paying for the telly and the duck-egg blue leather sofa". When money was, or appeared to be, available it was spent. Now that it is not available it is not being spent and it's beans on toast at home rather than chicken-in-a-basket at the Dog and Duck. Government spending includes countless sums on fripperies that appeared affordable during the bubble years. They weren't affordable before, so why are they still seen to be affordable now that the money has run out? It's sheer madness. But there are no votes in saying "we are going to get rid of half a million unnecessary people from the public sector payroll". Perhaps it would be a vote-winner if politicians had the guts to say that continuing to employ the pointless half million drains money that could otherwise be used to pay-down personal debt sooner or to allow a business burdened with taxes and the red tape of excessive regulation to stay afloat.

The truth is that there is only so much money and there is only so much wealth. Creating more money but no new wealth benefits no one. Only creating wealth allows an economy to expand and people to enjoy sustainable higher levels of material comfort. Creating wealth is a slow process once a certain level of wealth has been achieved. China, India, Brazil and others are creating new wealth at a fast rate because they are still far below the level we currently enjoy, indeed below the level we enjoyed twenty and more years ago. Once a particular level is reached it becomes difficult to create more. Perhaps two percent a year can be achieved, maybe even three, but two percent of a lot is a lot whereas ten percent of little is less and far more easy to achieve.

It's terribly dull to say "we are actually pretty comfortable in this country, so don't expect a lot more comfort any time soon". Yet that message is essential if there is to be any hope of realism entering governmental economic management. Our current government is clinging like a barnacle to the bubble of apparent but unsustainable wealth created by them allowing personal credit to get out of hand. Much of current government spending was only undertaken in the first place because of the tax revenues arising from the credit bubble. That revenue is no longer there, yet they insist on maintaining their spending as though it were. They don't have the courage to say "sorry chaps, I know it's rather dreary, but we can't afford it any more".

I long for dreary. I long for a government that sets its spending according to its income rather than vice versa. I long for a government with the guts to say "don't expect a lottery win, it ain't going to happen". It's not an easy sell, the desperate and irrational will never buy it, but I think most of the rest would if only someone grew some balls and tried it.