I'm as surprised as you are at my agreeing with them both but there is a great truth in this statement:

“The boom, not the slump, is the right time for austerity.” So declared John Maynard Keynes 75 years ago, and he was right....

Let us, just for a moment, adopt the Keynesian mindset, agree that the Great Man's works are indeed how the economy should be managed.....even accept that the economy should be managed at all. With that assumed then yes, of course this is true. Blow out the deficit in the slump so as to increase aggregate demand.

Excellent.

But then look at the other side of it: in the boom we should be running not just primary budget surpluses but actual full budget surpluses. No, not just to pay for past or future borrowing, but absolutely to manage, in fact to reduce, that aggregate demand that is excessive in that boom.

This has been managed how often since the immediate post war years? Under Lawson for a couple of years at the end of the 80s boom and under G. Brown for that brief period of time when he was following previous Tory budgets. But Keynes, and Keynesianism, would have had us running budget surpluses all the way from 2000, 2001, to the crash in 2008/9. Again, not so much to reduce the national debt, or to save up room for borrowing in the slump. But to take the top off, the froth off, that boom.

Didn't happen, did it? Even at the top, even the tail end, of the longest boom in modern economic history we were still running budget deficits.

At which point we can point out one of two things: Keyensianism doesn't work given the political system we've got which just won't allow such surpluses to be run: or Keynesianism just won't work with the politicians we've got because they cannot resist spending the cash to buy votes.

Either way, it doesn't work, not because spending in a slump is a terrible idea but because no one will, for any length of time, perform the other half of the necessary equation. Leaving us with the current situation of actually needing the austerity in a slump simply because we don't have the money to do anything else.

Thanks Gordon.

Gosh, this is just lovely. The Labour Party is going off to study the German economy and try to work out what makes it tick. So that it can be replicated here in the UK.

Hmm.

It argues that strong local and regional banks underwritten by local authorities have been crucial in providing loans to small and medium-sized enterprises, in contrast with the UK where the big four large remote banks have been repeatedly criticised for failing to fund industry.

Strange this: I don't see them mentioning that the German state bailout of the German banks was as, if not even more, expensive than the UK bailout of the UK banks. Nor that the part of the Spanish banking system, the cajas, which is falling over right now is in fact that part of it that was "strong local and regional banks underwritten by local authorities". Strange that really.

I also see no mention at all of the two things that have in fact kept the German economy motoring along. The first being a deliberately undervalued exchange rate so as to be able to run a large export surplus. The second being that Germany has just spent a decade deliberately screwing down the wages of the workers in order to further increase that exchange rate undervaluation.

That second not being a policy I'd expect any Labour politician to endorse, of course, but I'll not take their studying Germany seriously until they at least acknowledge that that is what was done.

Sometime ago here I mused on whether the socialist calculation problem would ever be solved. Would it be possible for computing speed and information gathering to ever become fast enough and detailed enough that it would in fact be possible to properly plan an economy? My conclusion was "not yet at least" for which I am grateful for the calculation of when it might be possible has just been done for us.

I said before that increasing the number of variables by a factor of 1000 increases the time needed by a factor of about 30 billion. To cancel this out would need a computer about 30 billion times faster, which would need about 35 doublings of computing speed, taking, if Moore’s rule-of-thumb continues to hold, another half century. But my factor of 1000 for prices was quite arbitrary; if it’s really more like a million, then we’re talking about increasing the computation by a factor of 1021 (a more-than-astronomical, rather a chemical, increase), which is just under 70 doublings, or just over a century of Moore’s Law.

If someone like Iain Banks or Ken MacLeod wants to write a novel where they say that the optimal planned economy will become technically tractable sometime around the early 22nd century, then I will read it eagerly. As a serious piece of prognostication, however, this is the kind of thinking which leads to”where’s my jet-pack?” ranting on the part of geeks of a certain age.

But note, that's the number for the Soviet economy of the early 1960s. When, according to the very mathematicians attempting to solve this problem, there were some 12 million products whose supply needed to be calculated. Gavin Kennedy tells us that the problem has rather grown since then what with technological advance and the further division of labour:

Brad Delong dramatised the stark gap between today’s Yanomamo stone-age, hunter-gatherers along the Orinoco River with modern New Yorkers along the Hudson River, by referring to the availability and access to products. New Yorkers have access to tens of billions of products supplied in complex product chains from across the entire globe, as against only several hundred for the Yanomamo people, limited as they are solely to whatever they can provide for themselves within their tribal territory.

So to be able to plan a modern urban economy we've added another one thousand times the complexity.

I think our answer is now clear. In any sort of timescale that matters to any of us here and now, planning of the economy simply is not going to be possible. I am willing to leave open the possibility that it will be possible at some time: but anyone desiring to make that assertion had better work out how to keep me alive for the centuries it will be before it can possibly be true. Be quite happy to eat my hat in return for that extended lifespan.

If proof were needed that our government institutions have a lot of fat to trim, consider the arrest earlier this week of Andy Coulson by Strathclyde police.

The former communications director for David Cameron was detained by seven Strathclyde police officers at his London home at 6:30 am on Wednesday before being driven all the way to Glasgow where he was formally charged at 10 pm for alleged perjury.

Yes, that’s right – seven cops from Glasgow hurtled down the M1 to London, rounded up Mr Coulson and then hurtled back to Glasgow. Seven! What on earth were they expecting? Mr Coulson barricaded in his home and yelling “Come and get me, you dirty rats!” followed by the rat-tat-tat of machine gun fire?

Such a high profile operation would clearly have involved the most senior staff in Strathclyde police in the decision-making process. Did no one speak up and say: “Wait a minute. Seven cops driving to and from London is gonna cost a lot. There’s a couple of drug gangs about to have a bust-up and we could use the lads there. Why don’t we just drop Coulson an email, demanding his appearance at our station here. EasyJet does a same-day return for about a hundred quid.”

But there’s no such mentality with other people’s money. So seven coppers blew hundreds, if not a couple of thousand, pounds on overtime, accommodation, food and fuel to haul in the dangerous Mr Coulson. In the greater scheme of things, that may not seem like a lot but as any household or business knows, sound long-term budgeting comes from counting the pennies on a thousand decisions a day.

We have our own problems with the coalition government’s economic policy but we also have huge sympathy for George Osborne’s biggest challenge – overturning a mentality in government institutions that has no real regard when it comes to spending taxpayer money.

In recent years, believers in a small state have largely failed to convert good intellectual arguments against interventionism into concrete political achievements. Whig argues for a change of gears by liberals, away from politics and towards a focus on single-issue group campaigning.

Classical liberals, libertarians or indeed anyone arguing for a smaller state (I’m going to use ‘Liberals’ as shorthand) have a serious problem. We don’t seem to be very successful at converting the corpus of intellectual work and powerful arguments against interventionism into concrete political success. Whilst the Archbishop of Canterbury, Polly Toynbee or Michael Sandel, to name a few, seem to think we are living in an era of unbridled free markets, any sensible observer can see that this is not the case; state capitalism or corporatism is the status quo. In reality, the trend of the last twenty years has been a move away from free markets with growing taxation and more regulation. What can be done to reverse this trend or at least to revive the momentum of support for limited government?

While there are some elements of the Conservatives and perhaps Liberal Democrats with (some) Liberal ideals – and one or two Labour politicians have sensible ideas on particular issues – there are no elements of mainstream political life we can call home. Fortunately, one might say the same for out-and-out socialists but I would argue that, given the size and reach of government and the state of public discourse, they are rather more at home in contemporary politics.

Read this article.

In most societies the rich are outnumbered by the not-so-rich (which for simplicity might be called "the poor").  This matters in a democracy because the poor have more votes.  There is thus always a tension between how much politicians will raid the wealth of the rich to distribute in benefits to the poor.  If they take too much, the rich might move away to generate their wealth elsewhere.  If they take too little, social unrest might result, possibly even revolution, which is not what the rich want, and certainly not what the politicians want.  These limits have set restraints on how far the process could go.

The tension is dynamic, sometimes favouring the one group, only to be redressed later by a tilt toward the interests of the other.  It could be argued that Britain in the 1970s, with a top income tax rate of 98 percent, had tilted too far against those who create wealth, and that this was redressed to some extent in the tax-cutting 1980s.

Unfortunately in recent years the politicians in democracies discovered a third group they could raid with impunity, distributing its wealth and assets to the poor without limiting too much the capacity and co-operation of the rich.  This third group has no votes, and does not therefore limit the electoral prospects of the politicians who plunder it.  The group is called the future.

Politicians found they could deliver benefits to the current poor by borrowing money that would have to be repaid by future generations.  Since those future generations are not here, they have no say in the matter, or any ability to influence current events.  There have thus been no restraints on the degree to which democratic politicians could raid their wealth in order to buy electoral popularity today.

Politicians in many countries learned how to do this, until the overhang of debt became so large that people doubted that it could ever be repaid.  If there is a solution to this problem afflicting democracies, one that is compatible with the democratic process, it has yet to reveal itself.  Perhaps some form of inviolable constitutional limits on borrowing might be a solution of sorts?

Nothing summed up the farcical nature of Ireland’s referendum campaign on the European Fiscal Compact Treaty better than the Finance Minister Michael Noonan’s assurance that Ireland’s only contact with Greece was “feta cheese and holidays”.

Members of the Yes campaign have, absurdly, claimed that rejecting the treaty, as the UK and the Czech Republic have already done, would mean expulsion from the EU. The hard-left No campaign has been even worse, framing the vote as a false choice between austerity and growth. (Cutting back the state is the only way to achieve growth.) Both sides have tried to create fear and confusion among the Irish electorate.

Like many other Irish expatriates, I have watched this with frustration. Despite the ugliness of most of Ireland’s No campaign, there is a strong case for Ireland to reject the Treaty.

The Treaty will introduce a constitutional amendment banning ‘structural deficits’, and will give Ireland access to the European Stability Mechanism lending fund. In laying the foundations for automatic fiscal transfers between states, the Treaty is the first step towards true fiscal union between EU states.

Much of the Treaty may seem sensible. The ban on running a structural deficit is a welcome nod towards fiscal sanity – at least, it would be if it meant something. In fact, the Treaty does not define what a structural deficit actually is.

Like the Stability and Growth Pact, which required member states to keep budget deficits under 3%, most governments will ignore the deficit rule. Since the Stability and Growth Pact’s ratification in 1997, twenty-four of the twenty-seven signatories have since broken the terms of this pact.

The goalposts have been moved in the past. As the Irish fiscal analyst Cormac Lucey has noted, the IMF and EU both recorded the Irish government as running a structural surplus in 2007. These organizations’ methodology was later revised so that Ireland was found to be running a €15bn deficit in 2007.

States may find it politically easier to raise taxes than to cut spending, only doing more harm to their economies.

Banning structural deficits would not have avoided the Eurozone’s current problems. The welfare expenditures that have helped to bankrupt Eurozone periphery countries like Greece and Portugal are excluded from structural deficit calculations. Bank bailouts, which have been enormous in Ireland, are also excluded.

Apart from this measure, the key to the treaty is the access to the European Stability Mechanism (ESM), a €700bn fund to lend to Eurozone government at below-market rates.

It is a cheap line of credit that is being extended to ensure Ireland stays addicted to debt and bank bailouts. Its structure is almost the definition of ‘crony capitalism’: Article 32 of the ESM Treaty puts the ESM literally above the law, giving it “immunity from every form of judicial process”.

About half of Ireland’s national debt has come from its massive bank bailouts – €64bn, or 40% of GDP. As many of us argued at the time, Ireland should have let these banks fail.

Rescuing them was an exercise in crony capitalism, done to protect the rest of the European banking sector, not to spare Ireland any long-term economic misery. Ireland’s two million taxpayers now each face a €32,000 bill for these bailouts.

Access to the ESM would continue this cycle. Last Friday, Justice Kevin Feeney of Ireland’s Referendum Commission refused to rule out the possibility that ESM money would be used to bail out banks again in the future. The “low” rate provided by the ESM is like a heroin dealer giving a junkie a discount.

This cycle of bank bailouts paid for by more debt on the backs of taxpayers has to end. One of the few reasonable voices on the Irish No campaign, Declan Ganley, has argued that bailed-out banks should be required to repay the bailouts recently injected to them. Those that cannot do so should be put through insolvency purges with their assets sold to the highest bidder.

If Ireland does not access the ESM, global bond markets would still lend to Ireland, albeit at a more costly rates. That may force Ireland’s government to let bad banks fail instead of letting taxpayers foot the bill.

Ireland’s debt addiction cannot be cured with more cheap debt. The ‘extend and pretend’ strategy of taking on more and more debt to avoid making tough decisions will eventually lead to disaster. However Ireland votes, it will still have to meet tough but necessary fiscal targets set by the IMF and European Union.

Ireland can’t kick the can down the road forever. Rejecting the Fiscal Compact Treaty would, at a minimum, force Ireland’s political establishment to accept reality and pull back from the crony capitalist course on which it has set itself.

On my way into work yesterday morning, I stumbled across a passage of Thomas Paine's American Crisis with which I identified. "Universal Empire," Paine wrote, "is the prerogative of a writer. His concerns are with all mankind, and though he cannot command their obedience, he can assign them their duty."

A sensible observation, for the nature of political speech - written or otherwise - has much more in common with decree than it does with mere suggestion, and this is precisely why it can be so hostile sometimes. Polemic is almost exclusively made with the express intention that someone, anyone, should obey it; that it is the mind of the hearer which governs whether the statement is enforced, rather than the will of the utterer, does not change the intent of the thing (rarely, if ever, have I heard a politician suggest that it would be perfectly reasonable for anyone to oppose the particular policies he or she champions).

And while our democratic society gives us the freedom to decline, the power of such speech — indeed, all speech — is still latent, bubbling just beneath the surface waiting for convenient facts to arise. Whether a particular group of people find a particular statement reasonable is likely to be based in their particular circumstances, and a suggestion which a large number of people happen to find reasonable is rather more likely to become policy than one which a large number of people find unreasonable. See the Great Pasty Reversal for evidence of a recent iteration.

This annoying problem of consent is why libertarians are so often frustrated with politicians: where the core of anything which can legitimately describe itself as a liberal belief is non-coercion, such an idea can only be translated into policy through legitimate democratic means. It is therefore necessary to wait for circumstances to turn in one's favour, for people to drink your particular flavour of Kool-Aid, before one can hope for political change.

Without wishing to portray myself as a socio-political Nouriel Roubini (anyone with a good reading list or financial adviser could have deduced the same), I and others like me now believe that the time when liberal principles can do the most good for our country is now: a year and a half ago, I wrote that European democracy could destroy itself through the over-provision for social welfare, at the time thinking that this would likely take place through the election of extreme right- and left-wing elements such as occurred in the late Weimar Republic.

I also suggested that it would very shortly become clear that Western governments would find themselves in a position where they could not meet their obligations, throwing the legitimacy of that same welfare-state model into question. Both of these have now come to pass with Greece, and there is a high degree of likelihood that similar consequences will come to pass elsewhere, in a very real and immediate way.

This is where Tax Freedom Day, which took place yesterday, comes in. Tax Freedom Day is an enormously useful — and remarkably effective — rhetorical tool to show how government makes life in difficult times just that little bit more difficult. It illustrates in real terms the central liberal criticisms of government: it is too large, too out of touch, too inefficient, too unfair. As a rhetorical tool it aims to convince, not to intimidate. It is meant to invite discussion, not threats and vitriol. Unless, of course, you're a reader of the Morning Star, in which case any opinion - no matter how crude - is fair game.

Yesterday the Morning Star, a broadly Communist rag which once served as a party organ of the Communist Party of Great Britain, rode swiftly and alone into battle to spearhead an underwhelming assault from the far left on Tax Freedom Day, straining to remind us that we really do owe the state for everything from the food on our tables to the roofs over our heads to, indeed, our very lives.

After wasting the first 200 words of the article dwelling on a somewhat improbable semantic interpretation of the term "Tax Freedom", an unnamed editor of the paper admonished us that "the tax you pay isn't subsidising vacationing tax collectors' Cuba Libres and frozen daiquiris on the beach in Barbados. [what?] It's funding your roads [privatised in France]... street lights [massively energy-inefficient, the bane of amateur astronomy]... old people's lunch clubs [a nice thing to do but query whether you really need a government for that] ... ambulances [privatised in the United States]... (and) crisis teams. [again, what? Robert Downey Jr.?]"

Because of tax's ubiquity, the paper argued, no-one escapes the requirement to pay homage: "if you are an average person [I try not to be], you were born using its revenues [wrong - private], are taken care of throughout your life using tax-financed resources [also wrong, so far] and you are likely to be buried or cremated using municipal facilities" [planning for it to be wrong: Viking longboat, Nova Scotia, huge party. Everyone's invited].

What's more, the Star adds, paying taxes is not just practical, but super-fun, too. "We actually enjoy working collectively," the paper writes, arrogating to itself the responsibility of speaking for all its readers, "to provide the things we all need" -- no mention on whether the computer servers hosting their website were provided gratis by fellow comrades-in-arms. They continue: "That's what human society is all about. Working together, living together, and playing together." 

Yet despite this the Morning Star spent little time, one measly paragraph, those two sentences reproduced above, informing us how much the average leftist enjoyed paying taxes, enjoyed spending the taxes of others, and no space at all on why they do not voluntarily give up fully all of their income to the state. I suspect it is because there is that pesky word in English which is used, not wrongly, in all cases where there is a complete surrender of freedom to ruler from the ruled. We return again to Paine, who wrote that "Britain, with an army to enforce her tyranny, has declared that she has a right (not only to tax) but to 'bind us in all cases whatsoever', and if being bound in that manner is not slavery, then there is not such a thing as slavery upon this earth."

Yet, improbably, the Morning Star drove on.  "To the Adam Smith Institute," they wrote, "we send this message... if you don't like it, all you free-market, anarchistic, individualist, solipsistic entrepreneurs, why don't you all bugger off into a corner... (while) we'll get on with building a decent society that cares for everyone in need and hopefully get rid of parasites, exploiters, and, most especially, the Adam Smith Institute."

We all know the history of Communism, and its record when it comes to dealing with dissent; so, with this, I offer no more. What the article says about the state of current thinking in the British far left is another question — the answer to which I shall leave entirely up to you. 

[While we're on the topic of the Morning Star, this letter to the editor is a classic — ed.]

A year ago I attended a seminar on space travel. Some of the libertarians there couldn’t wait to leave socialist earth. Sadly, while space travel is still in its infancy, some of us will have to do with a caravan. Is the government’s volte-face on VAT on caravans good news or bad news? Static caravans will only be taxed at 5% instead of 20%. And the pasty tax has been abandoned altogether. Should we rejoice? Or not?

Governments giving privileges to specific industries or people was very prevalent in the Middle Ages. One of the reasons why the industrial revolution took place is because this sort of preferment went out of the window around the time of the Glorious Revolution.  No longer were trade, monopolies and tax privileges in the gift of politicians. Individuals were (at least theoretically) treated equally before the law. The Rule of Law — with laws the same for everyone, predictable, and not at the whim of politicians — was one of the greatest export product the Anglo Saxon world ever produced. The insights and choices of billions of individuals began to steer the economy, instead of the preferences of politicians.

One place where this freedom delivered prosperity was Hong Kong.  Its landscape, people, and environment were very much the same as the rest of China. Yet it boomed while China remained static. In Hong Kong, the rule of law was applied equally, not in accordance with the whims of long-nailed mandarins or Confucian officials. Occasionally, this equal treatment needed reiterating: in the 1960s, Hong Kong's Financial Secretary John Cowperthwaite (the man behind the Hong Kong miracle) fended off attempts by industrialists to obtain preferment again and again. Two Cowperthwaite quotes on industries seeking preferment:

“I must confess my distaste for any proposal to use public funds for the support of selected, and thereby, privileged, industrialists, the more particularly if this is to be based on bureaucratic views of what is good and what is bad by way of industrial development”.

“I am afraid that I do not believe that any body of men can have enough knowledge of the past, the present and the future to establish “development priorities” — which presumably means procuring some developments as being good and prohibiting others as being bad”.

Or, to quote a certain Mr A. Smith from K. (who, sadly, is not a special advisor): “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

So the bakers and caravanners have won the day.  Good for them: I don’t like taxes being put on anyone.  But, really, politicians should stop giving preferential treatment to their friends, and stop punishing those industries of which they don’t approve. Either you charge VAT on everything (allowing for a lower rate), or you don’t charge VAT at all.

Wasn’t this government supposed to fight red tape? Differential VAT rates most certainly add an extra layer of costly bureaucracy upon businesses.  An equal sales tax for all goods and services would make clear what the tax is to individuals and dispense with silly side-effects such as having to ascertain whether take-away food is hot or cold to know whether VAT is due; or small people avoiding VAT by buying the largest size at Baby GAP.

But most important of all, equalising VAT would avoid the cringe worthy spectacle of politicians claiming to have bought their sustenance at none-existent pasty outlets.  It would be worth it for that reason alone.

• Tax Freedom Day falls two days later in 2012 as UK re-enters recession
• Austerity measures cut the Cost of Government Day back to 23rd June, seven days earlier than in 2011

The UK's Tax Freedom Day – the day when Britons stop working for the Chancellor and start working for themselves – falls today, 29th of May.

The Adam Smith Institute has calculated that, for 149 days of the year, every penny earned by the average UK resident will be taken by the government in tax. This year’s Tax Freedom Day falls two days later than it did in 2011.*

Tax Freedom Day falls later this year down to a number of factors. The double-dip recession, the VAT increase from last year, our high personal taxes, as well as fuel duty and stealth taxes, all mean that the government is taking a larger share of our hard-earned income. Britain’s tax burden is still too high and tax cuts are desperately needed to boost economic growth.

This year’s corporation tax receipts are a good example of how tax cuts can pay for themselves. There were large increases in tax revenue from onshore corporation tax, coinciding with the government’s cuts to the headline rate of corporation tax. Reductions in the corporation tax rate have brought the government higher revenues as more companies choose to invest in the UK. By stimulating growth and investment, tax cuts really can pay for themselves.

However, our Tax Freedom Day still falls long after the USA’s, on April 17th and Australia’s, on April 4th. Our only comfort is that our tax burden isn’t quite as high as France’s, which will have to wait until July to celebrate its own Tax Freedom Day. With Hollande now in power, that day could get even later in years to come.

Cost of Government Day

Tax Freedom Day only measures the money actually raised by the government in taxes, not the full amount it spends. The government borrows one pound for every four it raises in taxes, so if the full cost of government is considered the Cost of Government day, this would fall on 23rd June.

Last year’s Cost of Government day fell on 30th June, meaning that the government’s austerity measures have reduced the cost of government by 7 days. But, when we take into account the extra two days tax burden, the net effect of George Osborne’s austerity measures is a measly five days net cut in the burden faced by taxpayers. “A lot of work still needs to be done,” says the Institute, “ to bring down government borrowing and the Chancellor must make more tax cuts to allow greater economic growth.”

The ASI's Director, Dr Eamonn Butler, says, "Tax Freedom Day, which the Adam Smith Institute has been calculating for 25 years, is the plainest way to show what the tax burden really is. That is why the Treasury hates it. They of course want to conceal how much tax we pay, which is why they are so keen on stealth taxes."

"But we put in every tax, including stealth taxes  – income tax, national insurance, council tax, excise duties, air passenger taxes, fuel and vehicle taxes and all the rest – and show just how long the average person has to work to pay their share of them all. The stark truth is that this burden costs us all 149 days of hard labour every year. That's not how long a rich person has to work – it is the time the average person must labour for the tax collectors."

“In the Middle Ages a serf only had to work four months of the year for the feudal landlord, whereas in modern Britain people have to toil five months for Osborne’s tax gatherers.”

"An increasing number of economists believe that Britain's taxes are too high and are choking off recovery. Some politicians say they need to keep taxes high in order to balance the government's books. But the trouble with governments is that they always spend everything they raise in tax – and then as much more as they can get away with through borrowing. Just as the rest of us have had to cut back, so should the government. The UK economy would be a lot healthier for it." (Here's a video of Eamonn talking about the morality of capitalism.)

Steve Baker, MP for Wycombe, said: "Many congratulations to The Adam Smith Institute for making transparent the cost of government and just how far government lives beyond its means. It's time to ask whether society is well served by such a huge state or whether we wouldn't all be better off with institutions which know their limits.

"A wealth of evidence is currently emerging which suggests we should stop fibrillating and make a near-revolutionary commitment to ending crony capitalism and embracing social cooperation through business."

*TFD was 28th May in 2011, and this year’s date includes the extra day for the leap year. Our yearly estimation of Tax Freedom Day is regularly updated to match the Treasury's most recent figures.