Deficit and debt: Does anyone know the difference?

“OK, so there’s the water in the tub…”

In a recent conversation, a Labour Party member told me that the coalition was “borrowing more than we did in power”. I pointed out that this was wrong, that the deficit, what we are “borrowing”, is, in fact, down by a third under this government. He replied: “The deficit may be but the current government is still borrowing more money than the last government.”

You could write this off as simply the pig-headed economic illiteracy of a paid-up member of the party that helped us into the current mess. After all, Ed Balls, Labour’s man on the economy, can stand up in front of Parliament and say “The national deficit is not rising…er…is rising, not falling” (he was right the first time). But then you hear Nick Clegg say that the coalition is working to “wipe the slate clean for our children and our grandchildren”. Even David Cameron himself announced that “We’re paying down Britain’s debts”.

You begin to wonder if anyone knows what they are talking about. I’ve addressed the issue of what exactly is happening to the British government’s finances before but it seems it needs repeating.

We have two concepts here: a stock and a flow. Think of it like a bathtub. The stock is the water in the bathtub, the flow is the water either flowing in or out of the tub through the taps or plughole.

In this analogy the debt is the stock, the water in the tub; the deficit is the flow, the water pouring in from the tap (if our government was running a budget surplus water would be flowing out through the plughole but we’re some way off worrying about that). In other words, the deficit (flow) is the amount by which the debt (stock) is increasing.

Thus, it is possible to have a situation like we have now where the debt is increasing while the deficit is decreasing (imagine yourself turning off the tap and seeing the flow of water dwindle – water is still flowing into the tub). Borrowing is down, what has been borrowed is up.

In the final year of the last Labour government Alistair Darling borrowed £156 billion. In 2012 George Osborne borrowed £99 billion. The deficit had fallen but while ever there is any deficit at all debt will be rising. Another way of putting it is to say that in his last year Darling increased the debt by £156 billion and last year Osborne increased it by £99 billion.

This is why you can have a chart like this…

showing falling deficits coexisting with a chart like this…

showing rising debt.

This might all sound a rather long-winded way of stating the obvious but a ComRes poll late last year found that 49 percent of people wrongly think “The Coalition Government is planning to REDUCE the national debt by around £600 billion between 2010 and the end of this Parliament in 2015”. The correct answer, that “The Coalition Government is planning to INCREASE the national debt by around £600 billion between 2010 and the end of this Parliament in 2015”, was given by just 6 percent.

The British government’s out of control spending is the central issue in British politics today yet there is mass ignorance as to what is really going on with it. In large part this can be attributed to the misleading statements pumped out by the sloppy Cameron and Clegg and the dishonest Balls.

What actually is happening to the British government’s finances under Cameron and Clegg is that the debt is growing and will continue to grow but the pace at which it grows, the deficit, is declining. This is simple stuff even if our politicians struggle with it.

This article originally appeared at The Commentator

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Is the Conservatives’ economic trump card warranted?

Let’s roll

It is part of Conservative Party mythology that it is repeatedly elected to clean up Labour’s economic messes. Indeed, 1931, 1951, 1979, and 2010 saw Labour bequeath the Conservatives a steaming pile to deal with. The only possible exception was 1970 when, following the calamitous sterling devaluation of 1967, Roy Jenkins wielded the austerity axe and got the British government’s finances into something approaching order.

Yet, truthfully, Britain has been plagued with economic mismanagement from both sides of the Commons and Labour could make much the same complaint of the Conservatives.

In 1929 Ramsay MacDonald’s Labour took over an economy wrecked by the attempt of Stanley Baldwin’s Conservative government to peg sterling to gold at pre-World War One parity. In both 1964 and 1974 Harold Wilson inherited the messy aftermath of pre-election booms engineered by Conservative chancellors Reg Maudling and Anthony Barber respectively. In 1987 the Conservatives inherited the messy aftermath of a pre-election boom they themselves engineered.

The Conservatives’ playing of their economic competence trump card always required a fair bit of bluff.

Recent developments suggest that George Osborne might think of delving into the same old bag of Conservative chancellors’ tricks as Maudling, Barber and Lawson. This government has nailed itself to the mast of the economy. Put simply, if the economy is growing healthily come 2015 the Conservatives will win. If not they are toast.

So far it’s not looking good. News that GDP contracted by 0.3 percent in the fourth quarter of 2013 meant that the UK economy continues to flat line. This is nothing to do with so called ‘austerity’ but the entirely predictable and unavoidable consequence of a massively indebted economy trying to reduce its indebtedness.

Either way, whether the dreaded ‘triple dip’ is avoided or not, it is looking increasingly unlikely that GDP growth in 2015 will be of the magnitude necessary to bring re-election.

So with 2015 approaching, Cameron and Osborne might come to look favourably on incoming Bank of England governor Mark Carney consummating his flirtation with Nominal GDP Targeting (NGDPT).

NGDPT starts from the observation that money supply targets proved a poor rudder for monetary policy due to problems of defining the money supply and changes in velocity, and inflation targeting proved unable to prevent asset price inflation. With NGDPT the idea is that the central bank sets a path for nominal GDP growth and manipulates the money supply sufficiently to achieve it.

So, if it’s decided that nominal GDP should grow by 5 percent a year, and nominal GDP looks to be increasing above that rate, the monetary authority engages in the sale of securities so as to suck money out of the economy to get nominal GDP growth back on target.

Likewise, if nominal GDP was growing at a rate below 5 percent, the situation we are currently in, the monetary authority engages in the purchase of securities so as to pump money into the economy and get nominal GDP growth back on target.

NGDPT and the market monetarists who propose it have faith in the power of monetary policy. Austrian liquidation or Keynesian liquidity traps can be blasted out of existence with a sufficient charge of base money. Or, as Ben Bernanke put it in one of market monetarism’s foundational statements:

“the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

You can see the attraction of all this to Cameron and Osborne but will they be allowed to get away with it? The mass production of sterling dictated by NGDPT in our current predicament would, in theory, have the effect of reducing sterling’s value on the exchange markets which will make imports into Britain more expensive and Britain’s exports to everywhere else cheaper.

In practice this is exactly what has been happening. The massive expansion of its balance sheet by the Bank of England has seen sterling crash by 15 percent since 2008 which has propped up British exports (it is this avenue which wasn’t open to Ireland).

But if you devalue to boost your exports of goods and services, any increase in those exports is matched by a reduction in someone else’s. This is why the competitive devaluations of the 1930s, as countries scrambled for a share of diminishing world trade, became known as ‘beggar they neighbour’.

And it looks unlikely that our neighbours are going to let themselves be beggared by Britain’s NGDPT. The Federal Reserve continues to buy $85 billion of bonds each month. In Japan Shinzo Abe is pushing an inflation target of 2 percent in a bid to boost its flagging exports. This will come at the expense of German exports which might cause policymakers in Berlin look more kindly on François Hollande’s calls for a devaluation of the euro. The race is on to see who beggars who first.

This article originally appeared at The Commentator

Referendum reaction

The three stooges

There’s been more than enough reaction to Cameron’s referendum speech today without me clogging up your bandwidth with my two penneth. But, for the lulz, I thought I’d offer you this from my statist friend

“I think the average person’s attitude to an EU referendum would be “well, if Miliband, Cameron and Clegg are in favour and Nadine Dorries, Nigel Farage and Bob Crow are against, then given that by and large the former appear to know what they are talking about and have positions of responsibility and by and large the latter are raving nutters who you wouldn’t trust to run a whelk stall, and as I can’t be arsed to go onto the intricacies of the argument myself, I am going to vote to stay in”

Yes, you read that right. Someone saying that Cameron, Clegg, and Miliband “know what they are talking about” I don’t know about you, but if any of them told me the sky was blue I’d want to go out and check for myself.

2015: Time for Cameron to ‘hug a Ukipper’?

The Battle for Britain

In 2005 the Conservative party crashed to its third defeat at the hands of Tony Blair’s Labour. Michael Howard delayed his resignation to give the Conservatives time to reflect on how they had reached this sorry state and ponder what they should do about it.

Looking back to their last days in power before the 1997 election defeat Conservatives saw three factors at play. First, was their bitter civil war over the European Union; second, the steady stream of sleaze scandals; and third, general public boredom with a Conservative government which had been around since 1979.

But by 2005 most of these issues had gone. Blair had neutered Europe as an issue for the time being by promising a referendum on British membership of the euro. In government, Labour had proved just as sleazy as the Conservatives were. And, after eight years of Labour government, the Conservatives looked ever so slightly fresher.

And still they lost. Even against a Labour government which had bent the facts to send British soldiers into Iraq to remove weapons of mass destruction which weren’t actually there, they had lost. Again the question: why?

A bit of research emerged at around this time which showed that people generally approved of Conservative party policies until they found out they were Conservative party policies. To one group of Bright Young Things this indicated that the problem was one of marketing and the search was on for a salesman. Step forward David Cameron.

Cameron had only been in Parliament for four years before he decided to run for the Party leadership. But he had plenty of political experience; indeed, he had done little else since university. He went straight into a job with the Conservative party. From there he became Director of Corporate Affairs (whatever that is) for a TV company, a role which appears to have involved talking to politicians a lot.

It was this presumed media savvy which won Cameron the leadership in 2005. The party wanted someone to put an acceptable face on apparently popular policies. It didn’t want to be Theresa May’s “nasty party” anymore and Cameron promised to make them “feel good about being Conservatives again”

He and the Cameroons who gathered around him had reached political maturity during Blair’s reign. They had seen how Blair had taken over a party which couldn’t even win an election against John Major in the middle of a recession and comfortably won three elections on the bounce. They believed Blair had managed this by ‘detoxifying’ the Labour brand, by taking on and ridding the party of its madder elements. They determined to do the same for the Conservatives.

On one level this meant delving into Blair’s bag of media tricks. Call Me Dave gave speeches without notes, took his jacket off, went sledging, rolled his sleeves up, hugged hoodies, and at the 2006 party conference he made more wardrobe changes than Elizabeth Taylor in Cleopatra.

But on a deeper level the Cameroons were searching for a ‘Clause IV Moment’, the symbolic point when you tame your extremists and embrace electability. Their calculation was that they could bully and pick fights with their ‘right wing’ and in doing so they would attract support from the fabled ‘centre’. After all, they reasoned, any right wingers who didn’t enjoy being bullied by them had, like Richard Gere, “nowhere else to go

But there was a problem. By 1994 the Labour left had been so utterly discredited that the original Clause IV Moment was simply an overdue act of euthanasia. In theory, and in practice, during the post war period the left wing orthodoxy of high tax and even higher public spending had been exposed as the economic suicide it remains.

By contrast no such thing happened to the ideas of the Conservative right. Indeed, the last few years have seen one formerly ‘controversial’ view of theirs after another be resoundingly vindicated. Immigration is too high. Government is spending too much. The euro is a disaster.

Ultimately the Cameroon strategy failed. After five years of ‘rebranding’, against one of the most incompetent administrations in history, and in the middle of a recession, in May 2010 the Conservatives failed to win their fourth election in a row.

And those right wingers didn’t just sit around meekly soaking up the punishment Cameron dished out to them in a vain effort to impress the Guardianistas. Lots of them buggered off to UKIP. And how did Cameron, the master political operator (sic), respond? He was gratuitously rude to them. Again. In the Telegraph last week Dan Hodges wrote that come 2015 “the vast bulk of [Ukip’s] remaining support will come home, reluctantly, to David Cameron.” No, it won’t. And why should it if Cameron keeps abusing them to solicit a favourable glance from Polly Toynbee?

Cameron’s support rises when he pursues Conservative policies; the EU veto and welfare reform, for example. Now, I’m no Central Office genius, but perhaps there’s something in this? Perhaps it’s time for Cameron to stop his fruitless flirting with some mythical centre (which is, in reality, just a punji trap with the sharpened heads of George Monbiot and Mehdi Hasan at the bottom) and remember that he’s a Conservative?

The long term Cameroon strategy of replacing the Conservative right with the Labour right will fail. Its hysterical reaction to even the mild fiscal medicine administered by the coalition demonstrates that Cameron will never find enough votes from that quarter to replace the real Conservatives he sent off in Nigel Farage’s direction.

As 2015 approaches Cameron might find he needs to Hug a Ukipper. If he carries on this pathetic baiting they’ll probably tell him to get stuffed.

Silly Lily

This picture has become popular among the anti cuts crowd

There’s just one problem; it’s bobbins. Let’s see how…

1 – Are Cornish pasties a ‘working class food’?

2 – There is a tax on Polo mallets, VAT at 20%.

3 – No on was voted in, that’s why we ended up with a coalition.

4 – He ‘Seriously’ wants to see David Cameron and George Osborne beheaded. Seriously? Get a grip.

5 – Sadly most of what the bankers did was perfectly legal and was encouraged by the Labour government who showered the tax receipts of the property boom the bankers created on its clients in the welfare state and public sector.

6 – The working classes are not portrayed as rioters. The working classes were too busy working to go out rioting. It was elements of the permanently unemployed (and probably unemployable) underclass that went ram-raiding for new shoes.

Paul O’Grady is a funny bloke. A political sage he is not.

Black Wednesday

Lamont and advisor run up the white flag

I’ve mentioned before that I’ve been jotting down some notes about the 1990s. As today is the twentieth anniversary of Black Wednesday, I thought I’d share what I’ve written about that…

In 1990 the British economy entered a recession caused by the raising of interest rates from 7.38% in May 1988 to 14.88% in October 1989. Thatcher’s government did this in an attempt to dampen the inflation they had unleashed with a pre election spending boom between 1985 and 1988 though they claimed it was that it was to prepare Britain for entry into the Exchange Rate Mechanism.

I remember all this quite well. The area I lived in was full of people with mortgages, people who had embraced the Conservative ethos of the property owning democracy in the 1980s. And now, in the name of European integration, they were being crucified on a cross of ERM by the same Conservative Party. ‘Repossession’ became a dreaded spectre, figures reported on the evening news. In 1989 there 15,800 repossessions, in 1991 there were 75,500 and I remember kids I was at school with losing their homes. As a Northerner down south my dad became something of a local oracle in how to deal with tough times and I remember a couple my mum knew through her babysitting group coming round for tea, digestives, and advice in how to deal with a mortgage they could no longer afford.

John Major possessed impressive reserves of self belief so he might not have been as stunned as everyone else by (his election victory in April 1992). Even so, these reserves were quickly depleted. Within six months of the election the Conservative Party had thrown away its trump card of sound economic management (the playing of which always involved a fair bit of bluff) and handed Labour a poll lead which it wouldn’t lose except briefly for another fifteen years.

The Exchange Rate Mechanism had been forced upon an unwilling but weakened Thatcher a month before she left office by Major, as Chancellor, the rest of the cabinet, and the civil service. It committed Britain to keeping the value of sterling pegged to the value of the deutschemark. When German spending on reunification threatened to stoke inflation the Bundesbank raised interest rates and, thus, the value of the DM. Britain had no choice but to follow.

Two approaches were pursued, both of them disastrous. First, more than £3 billion of Britain’s foreign currency reserves were spent on buying sterling in an effort to push its value up. All that did was make George Soros even richer. This just left interest rates.

Matters came to a head on September 16th 1992. That morning, with the cash for further currency manipulation gone, the government announced a rise in interest rates from 10% to 12%. Still the value of sterling fell. In the afternoon the government was forced to announce a further rise in interest rates to 15%. Even this failed to stop sterling’s slide. In the evening an exhausted looking Chancellor, Norman Lamont, emerged from Number 11 Downing Street with a young policy advisor named David Cameron at his side to announce defeat. Britain would leave the ERM and devalue.

Britain’s failed attempt to stay in had been nothing more than an expensive way to cause more pain for already suffering British businesses and mortgage holders. It became known as Black Wednesday, unless you were a Eurosceptic, in which case it was White Wednesday.

The Major government never recovered. The day after Black Wednesday Major phoned The Sun’s editor Kelvin MacKenzie and begged him to go easy on the government. “John”, MacKenzie is said to have replied, “I’ve got a large bucket of shit lying on my desk and tomorrow morning I’m going to pour it all over your head”

But after Black Wednesday something remarkable happened. With the government’s credibility on monetary policy utterly ruined the Bank of England was put in charge with the goal of using interest rates to control inflation. Worrying about the value of sterling vis a vis other currencies was in the past. And it seemed to work. The economy recovered and embarked on its longest ever boom. Unemployment fell from nearly 3 million in early 1993 to 1.7 million in early 1997. The economy, it seemed, ran better without politicians ‘managing’ it.

Memo to Dave: No matter how much rubbish you talk, Guardianistas won’t love you

Scorned again

If you wanted lamb chops you wouldn’t go to Holland & Barrett. If you wanted a cheap shirt for work you wouldn’t look down Jermyn Street. And if you wanted a lecture on morality you wouldn’t go to a politician.

But that’s what we got last week in the midst of ‘Carrgate’. On Wednesday, David Cameron branded the comedian’s tax arrangements “morally wrong”. Then, on Thursday, when asked what his thoughts were on the similar tax arrangements of Conservative supporting singer Gary Barlow, Cameron muttered“ I am not going to give a running commentary on different people’s tax affairs. I don’t think that would be right”

On less flip floppy but no firmer ground was Danny Alexander. On that righteous Wednesday he thundered that “people who are deliberately going out of their way to try and bend the rules to avoid tax, are the moral equivalent of the people who cheat the benefit system”

This remark didn’t go unnoticed by singer turned moralist Lily Allen, whose song Fuck You is up there with Bob Dylan’s The Lonesome Death of Hattie Carroll as one of the great political statements in popular music. “How are tax avoiders ‘the moral equivalent of benefit cheats’ ? . Surely they’re a hundred times worse ?” (sic) she tweeted before calling someone who disagreed a “fascist” – a striking display of idiocy from someone so expensively educated.

’m no fan of Jimmy Carr, although he did once give me directions on Islington’s Upper Street. I don’t find him funny and for a comedian praised for his edginess I’ve always been surprised by how old fashionedly showbiz his TV shows are. Indeed, if you wanted to list your top three Steve Guttenberg movies I’m sure Jimmy Carr would be happy to host a program about it on E4. But has he actually done anything wrong?

Let’s start with Alexander and Allen. There is, in fact, a world of difference between someone acting legally to keep hold of money they earned (tax avoidance) and someone acting illegally to get hold of money someone else earned (benefit fraud). It was precisely this argument that Allen branded “fascist” before saying that “we’re talking morals not legalities”.

This brings us to Cameron’s point. The problem with making tax a moral issue is that taxes have to be, as Adam Smith put it as long ago as 1776, “certain, not arbitrary”. And morality is an arbitrary issue because each of us has their own moral code.

Thus, I find the coalition’s reforms to housing benefit reasonable and long overdue. Polly Toynbee regards them as nothing short of an attempted “final solution for the poor”. Personally, given that our engorged government spends tens of billions of pounds it shouldn’t, I see nothing inherently moral or noble in giving it money you don’t have to. In fact, I view tax avoidance as perfectly moral in the face of a bloated and wasteful government. But that’s me, and you might disagree.

The best way to avoid these sorts of clashes is the old live and let live, maximising the arenas of life in which individual choice is sovereign. However, this is not possible in cases where the actions are of their nature collective, like paying taxes.

But if we are to respect private property, which is not only right morally (in my view) but also from a perspective of increasing all our wealth, then we have to have a tax system in which your earnings can’t be taxed away ‘just because’. At some point we need to move away from morality and towards legality. We are back with Adam Smith.

So we draw up a tax system which all of us know about in advance. You break it, you’re a tax evader. You don’t, you’re good to go. And that is where Jimmy Carr is. Telegraph blogger Dan Hodges put it as well as anyone:

“What precisely has he done that’s immoral? Has Jimmy Carr earned his money legally? Yes. Does he pay tax? Yes. Does he stand accused of tax evasion? No. Has he paid the maximum amount of tax he is legally required to? Yes…We have an obligation to pay our full amount of tax. We don’t have an obligation, legal or moral, to pay more than that. That’s why we have a mandatory tax system, not a system of voluntary charitable contributions to the state.”

So why the outpouring of blather about Carr’s taxes? Allen is just a celebrity dimwit. Alexander is playing to his restive party members. He was at it again this week, saying that“ If we could narrow the tax gap in this country by a quarter we could reduce income tax for every basic rate payer by 2p in the pound” He doesn’t seem to realise that the same effect could be achieved if he just cut spending.

And then there’s Cameron. Never one to let the low hanging fruit go ungrabbed, getting all moralistic about Jimmy Carr probably seemed a great way to try and win a few brownie points with Guardian readers. Predictably, it blew up in his face. When will he learn that he can never, ever, talk enough rubbish to make Guardianistas love him?

This article originally appeared at The Commentator

If you are looking for useful insights into the behaviour of homo economicus, don’t look to the left

UK Uncut – Where RAG Week never ends

Few subjects currently arouse the political passions quite like that of tax avoidance. Such is the subjects’ flammability that the antics of glorified Rag Week pranksters like UK Uncut have, none too indirectly, prompted government action. And, predictably, action with such pitiful inspiration has blown up in the government’s face.

It might be wondered why tax avoidance generates such emotion. It’s a perfectly legal activity after all, even though some people seem incapable of (or unwilling to) understand the difference between tax avoidance and criminal tax evasion.

Indeed, most of us are tax avoiders. If you have ever modified your behaviour because of taxation, say by taking the train to Edinburgh rather than the plane, quitting smoking, or buying a little less of something because VAT has gone up, you are a tax avoider.

To illustrate the scale of this common or garden tax avoidance, here, literally, are some back of a fag packet calculations. There are 10 million ex smokers in the UK. The average smoker smokes 13.5 cigarettes a day (13 for women, 14 for men) so that is 135 million cigarettes these people are not smoking everyday. Now, with the each tab generating 26p in tax that is a whopping loss to the Exchequer of over £35 million per day because these people stopped smoking. Can we expect to see the guilt ridden middle class poseurs of UK Uncut chasing ex smokers down the street, throwing fags at them and demanding that they continue to puff for the public sector?

In fact, whole areas of public policy rely on us being tax avoiders. Government raises taxes on smoking and drinking (ostensibly) to get us to smoke and drink less. They put all manner of green taxes on carbon consumption because they want us to consume less carbon. To assume these measures will have any effect you have to assume first that most people are responsive to tax changes; that they are tax avoiders, in other words.

Recognising perhaps that government would have very few policy tools left if there were no such thing as tax elasticity, George Osborne has lately been trying to distinguish between this widespread fact-of-human-nature tax avoidance and what he calls “aggressive tax avoidance” which he finds “morally repugnant”. As you might have expected, policy based on such a non-existent distinction has come a cropper.

You will know the details by now: rich people are giving money to charities and offsetting this against tax liabilities. This has the effect of reducing the newly popular but entirely bogus‘effective’ tax rate paid by the rich. To prevent this, the government announced plans to cap the tax relief on charitable donations.

All hell broke loose. Apparently it came as a shock to Osborne and David Cameron to find that if you effectively tax charitable donations, charitable donations might actually decline. That they should have been so stunned is quite bizarre. As we’ve seen, swathes of public policy depend on us being tax avoiders. And, in the very same budget, Osborne announced the reduction of the top rate of tax from 50p to 45p citing exactly those incentive effects that he dismissed when applied to charities.  The eminently avoidable fiasco looks likely to end in a clumsily executed U turn.

You could have known all of this, in fact, before it happened. That is because, to repeat, people are generally tax avoiders. Individuals generally think that they have the most right and are the best qualified to spend the money they earn on satisfying their wants and needs.

This is not to say that the tax avoidance bandwagon does not have some support. But when you ask people which taxes they think should be increased or whose avoidance should be clamped down upon the answer is always the same: “Somebody else’s”.

This natural self interest is something the left has always struggled with, as demonstrated by their renaming it ‘selfishness’. It is a key tenet of left wing belief that state spending is good (not entirely coincidentally very many on the left receive large amounts of their income from state spending). This is why you heard people supporting the retention of a 50p tax rate which actually saw the rich pay less in tax. This arose because, if you hold to the idea that state spending is good, then if your taxes increase you will simply keep on working or giving to charity as before and taxes will rise proportionally. And, by extension, if the goodness of state spending is so self-evident, then everyone will think like this.

But they don’t, as common sense and a wealth of history attest. Instead people have some idea of what they should fairly be paying in tax and any attempt to raise the tax take much beyond this is doomed. Obviously, with a raft of lawyers and accountants on the payroll, the opportunities for the rich to skip out of any increase are greater than for others.

If you are looking for useful insights into the behaviour of homo economicus don’t look to the left. The effective raising of tax on charitable giving was always going to lead to less charitable giving because the levying and raising of tax on anything generally leads to less of whatever is being taxed. The government has waded into this avoidable mess because it has been led in the search for the limit of what people will hand over to the state by people who don’t believe such a limit exists.

This article originally appeared at The Commentator

Taxpayer funding for political parties? Why not pensions for life for armed robbers too?

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Not the only bubble that’s burst

Whether it’s General Motors or RBS, no failing enterprise has ever truly breathed its last before gasping the plea for taxpayer funding. ‘Dinnergate’ provided the opportunity for Britain’s failing political parties to utter the immortal words.

In the general election of 1951 Labour and the Conservatives got over 95 percent of the vote between them. Labour got 13.9 million votes, the victorious Conservatives, by a quirk of the electoral system, 12.6 million. In the general election of 2005 labour and the Conservatives got just over 67 percent of the vote between them. The victorious Labour party got 9.5 million votes, the Conservatives 8.7 million. Losing that sort of market share is catastrophic.

Though obscured by First Past the Post the trend in British politics in the post war period is clear; a decreasing number of British voters are interested in either main party.

This increasing lack of interest in either the Conservatives or Labour has also been reflected in falling membership numbers. Perhaps counter intuitively for the self proclaimed party of the working man, Labour party membership has always lagged Conservative party membership. But, even so, in 1953 Labour had more than 1 million members and the Conservatives had 2.8 million.

With occasional reverses Labour party membership fell steadily until 1979 by which time it had fallen by a third to 666,000 members. Then came the Winter of Discontent and, as well as losing power to Margaret Thatcher, Labour lost a staggering 318,000 members in one year.

By the late 1960s the Conservatives had fallen to 1.1 million members but held steady until the early 1990s. From 1 million members just prior to Thatcher’s ousting in 1990 membership had halved to 500,000 in 1992.

But even these figures now look like some halcyon age of mass participation. By 2010 Conservative party membership had slumped to 177,000 while Labour was enjoying a “surge” in membership to 60,000 – a disappointing crowd at Old Trafford. No wonder that Britain’s political parties now find themselves in the position of a busted bank or bankrupt car company.

In the absence of membership fees the effect has been a reliance on ever fewer donors giving ever more money. Lord Ashcroft kept the Conservatives going almost single handed in the wilderness years after 1997. Labour, out of power and drifting to the left, holds little appeal for those with bulging wallets; Labour received just 13 private donations in the year from September 2010. Labour is now reliant on the trade unions (who themselves represent just a fraction of the workforce they used to) for over 80 percent of its funding.

The politicians’ ever greater flattery of their ever fewer donors is a nauseating sight and when it doesn’t cross the line into the criminal it certainly radiates a sleazy impression, as with Cameron’s latest kerfuffle.

The proposal for taxpayer funding of political parties is usually floated in the wake of such scandals. Perhaps because the threat of bankruptcy is very real for the Labour party (a rare example of politicians practising in private what they do in office) the demand for taxpayer funding has come loudest from the left. In the wake of Dinnergate, a Conservative scandal remember, the New Statesman carried articles by Labour MP Denis McShane and Mehdi Hasan arguing for taxpayer funding of political parties. As McShane put it, there is a need “for democracy to pay for democracy”

There is nothing of the sort. There is, instead, simply the desperate desire for members of failing enterprises like Britain’s major political parties to be bailed out. If you won’t give them your money voluntarily they will take it straight out of your paycheque.

Hasan quoted the Independent’s Mary Ann Sieghart saying that “our government was being corrupted by shady donors” so we must introduce taxpayer funding. This idea, that because we cannot trust politicians to raise money honestly we must give it to them in taxes, is absurd. By that way of thinking we would ‘punish’ armed robbery by giving the robbers pensions for life.

The question few seem to ask is why this is happening. Why are our major political parties becoming so noxious that Labour, with a 10 point lead in the polls, can lose a safe seat to a sectarian bigot? Why do 72 percent of voters see the Conservative party as “out of touch”? Answer that and you have a solution to party funding which doesn’t involve taxing people more.

There are long term secular trends. In terms of voting the decline can be attributed to some mixture of weakening class identification and growing disillusionment with both main parties’ inability to deliver on their grand promises. In terms of membership people join thing things less than they used to whether it’s political parties or the Dennis the Menace Fan Club.

But there’s another factor. Why should people give money to people who don’t like them? When Gordon Brown was overheard calling a lifelong Labour voter a “bigoted woman” just for asking some valid questions about immigration he revealed more than he knew. He revealed that the Labour party is run by a metropolitan elite which views its core voters in places like Rochdale as a bunch of unreformed hicks.

The same goes for the Conservatives. The strategy behind Team Cameron was that if they alienated enough of their core vote they would attract enough Guardian readers to more than make up for it. It failed. In the Telegraph Iain Martin wrote that “A fundamental miscalculation was the decision by this group to ape Mr Blair and define themselves in opposition to their party and their core supporters.” You can understand why Conservative party members might balk at giving money, or votes, to people who view them like this.

The truth is that both Labour and the Conservatives are run by people who don’t like Labour or Conservative voters very much. Those voters are entitled to keep their hands in their pockets and not have them picked by taxpayer funding.

This article originally appeared at The Commentator