Over-taxed and over-spent


Yes, we have to balance the government budget, and yes we have to work from both ends of the profit and loss sheet. Government needs to spend less, and it needs to raise more revenue. In other words, the government's financial managers have to rein in things like the cost of welfare, and state education, and state pensions, and raise the amount they bring in through taxes and charges.

Of course, as we know from Arthur Laffer and his famous Curve, raising tax rates is not necessarily the best way to raise tax revenues, especially when it is already high. Some economists reckon that Britain's new 50% top income tax rate – and more on top thanks to the social-insurance tax of National Insurance – could be enough to drive many of the country's financial deal-makers to lower-tax jurisdictions such as Switzerland. Britain's financial centre, the City of London, already benefited by attracting talent from over-taxed Manhattan: now it might be leaking it to Zurich.

For many years, people in the UK and the US alike have 'saved' by buying assets such as pensions and houses. Now a lot of those 'investments' have gone negative on them, or at least have proved to be not the cash cows they once seemed. So people are having to curb their household spending – to cut back on consumption, as the economists say. And it may not be easy to adjust; mortgage rates have fallen, but many people are locked in to other forms of contract – on their phones, their cable or satellite TV package, their car finance – that they can only break by paying a large penalty. Meanwhile, their bankers are screaming at them to cut what they borrow for themselves and their businesses.

The trouble with higher taxes is that they just add to people's woes. They add to the costs that people cannot escape, and make adjusting to the new, lower-consumption reality that much more difficult. It's bad enough for businesses already that people are cutting back. If they have to cut back even further to pay higher taxes, the bad news multiplies. If people aren't going into the shops, the shops will not invest, expand and grow. The gloom will be passed on to their suppliers, who will invest less too. And so on. In summary, the whole economy becomes even more depressed because the government is dipping deeper into our pockets.

Our problem is not that we have under-taxed the public; it is that our governments have spent and borrowed too much. It is that which governments need to change, and in a big way.