Sunday, July 20, 2008

Taxpayer can bear no more!

So says no less than UK Chancellor of the Exchequer Alistair Darling!

In an interview with The Times he has said that UK taxpayers are at the limit of what they are prepared to pay for "public services". Well, that's not going to stop him taking more money from my pay packet assuming I get another pay increase this year and a bonus. Nope, can't see my taxes being capped.

Of course what this is about is that the UK Treasury is in a rather dire state. On the one hand, the British government continues to be profligate with its state sector, the most recent profligacy being the nationalisation of Northern Rock, a building society that had clearly loaned too much to too many who couldn't pay them back. It also is running a substantial budget deficit, £24.4 billion in the three months to June alone. National debt (government debt) threatens to rise above 40% of GDP and there is now talk of borrowing to pay for current spending, not just capital investment in hospitals, schools, defence and transport. On top of that tax receipts are down, as the economy slows down.

In short, the newLabour reputation for fiscal prudence is looking badly damaged. The solution it chooses? Borrow more.

During the good times, the UK government didn't run budget surpluses - which it could have to lower debt and build a buffer of financial capacity to borrow during bad times. No, it continued to pour money down the enormous fiscal black holes of social spending, subsidising more housing, little used (and extraordinarily well used) railway services and the every hungry NHS.

So, whilst the Keynesians out there aren't worried - they always advocated borrow, spend and hope, the truth is that more borrowing is going to hurt.

Borrowing more means the UK government is competing with others for credit - given how tight credit has become for businesses and homeowners, this will only exacerbate the problem. In short the state sector will be competing with the private sector for credit. This only makes sense if you think the state sector can spend money better than the private sector, which is dubious at best. So expect interest rates to rise, further hurting businesses and mortgage holders (and so further dampening down house prices).

Secondly, borrowing more, particularly from offshore, will be inflationary, as it pumps more money into the economy.

There is, of course, the demographic timebomb contained within the UK national debt. The £640.5 billion of national debt consists of 44.2% of GDP, and this is at a time when the population is progressively aging, putting a higher strain on an already undercapitalised "national insurance" fund (which is no more a fund than any other Pay As You GO tax funded system) for pensions and the NHS.

So with credit tight, housing prices (and much of the private sector savings) heading downwards in most of the country, fuel and good prices soaring, the trade union movement is also starting to be restless. Calling for state sector wage increases well above inflation, naturally not giving a damn about the rest of us who would be forced to pay for them.

The Daily Telegraph editorial on Saturday
does suggest a different approach, which is simply to do what householders and businesses are doing in a recession. Look for efficiencies in government spending. When the government spends money it is taken from elsewhere, taken from consumers and businesses. So when it is spent on wasteful activities that generate little return it is destructive to the economy.

For far too long the answer to problems in the UK has been to ask the government for money, and the new Labour administration has obliged. It is time for the Conservative Party to out the waste of government, and to wage war against it. Some simple questions could be asked of all government spending by those in control of it:
1. Will the spending genuinely generate more money for taxpayers than was taken away?
2. Would taxpayers voluntarily cough up funds for this spending if given the choice?
3. What harm would happen if this money wasn't spent at all?

Those are questions politicians of the British Labour Party seem unable to ask, it's about time they were.

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