Thursday, March 04, 2010

Debt And Taxes


An alternative to emigration

[NB If you find A Level economics an insult to your intelligence, skip this post]

How much is this wretched government costing us?

For many years our politicos wanted us to focus on taxes, including the famous tax bombshell that nuked Labour in 1992, and the NuLab pledge not to increase income tax that helped them win in 1997. But taxes are only part of the cost of government. As we have all surely come to realise by now, we also need to consider the debt government runs up in our name - the costs that will hang round our necks for years to come.

Consider the following two charts. The first shows taxes as a percentage of GDP - the traditional measure of the cost of government:



On that basis you might conclude that our current spendthrift government hasn't done too badly. In fact, they've managed to keep the average tax take more or less in line with the average achieved under Thatcher/Major - 35% of GDP.

But when we add in borrowing we can see just how shocking Labour's performance has actually been. The government's total take of 46% has already soared beyond anything we've seen in the last half century, even in the benighted 70s*:


What could be clearer?

Except we've recently heard a number of Labour apologists telling us that conflating tax and government borrowing is like adding together apples and pears. Whereas we have to pay £100 of taxes out our incomes right here and now, we only have to pay around £5 of interest on £100 borrowing. So there's a huge difference, and people like Tyler shouldn't get so steamed up about "short-term" government borrowing.

But the point about borrowing is that we either have to repay it - in which case we have to reach into our pockets for £100 - or we have to go on paying £5 a year for ever. At the end of 20 years we'll have paid out £100, and at the end of a century we'll have paid out £500. It's no different to borrowing on a credit card.

Think of it in terms of your wealth rather than your annual income. Sure, you can borrow on a credit card to finance your holiday. But in terms of your overall wealth - ie the sum of your lifetime income and all your current assets - you're no better off than if you'd paid for it out of this month's salary cheque. Indeed, at current credit card rates you'd have been much better off saving up for it.

The truth is that whether the government taxes us today, or borrows and taxes us tomorrow, our overall wealth suffers just as much. And when we're judging how much this government is costing us we need to look not just at current taxes, but also at current borrowing.

Of course, as the Major keeps reminding me, when it comes to paying future taxes, there are a couple of loopholes. First, there's emigration to a low tax domicile, as currently planned by the Major, the Golf Club Committee, and most of Tyler's acquaintances. And second, there's the tax optimised shuffling-off option (see ad above).

(For 5 extra A Level marks, see also this blog on Ricardian Equivalence, the 200 year old idea that government debt is no more than deferred taxation, and that debt funded tax cuts fool nobody).

*Footnote - Our figures for the total government take comprise taxes and borrowing. They therefore exclude various minor items like the government's receipts of interest and dividends. They also exclude the trading surpluses of nationalised industries.

PS Talking of low tax domiciles, how much longer are the BBC and C4 News going to headline the latest twists in the sorry Ashcroft saga? Yes, it's bad that rich non-doms fund our political parties, and it's bad that rich guys can buy peerages - we'd stop both tomorrow. But since all three parties are up to their necks in the self-same pits of shame, why are our mainstream broadcasters picking on the Tories? Anyone would think they were biased, and we know that can't be true.

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