Catastrophe Insurance

Why Britain must act*

Yesterday the state broadcaster once again gave over a huge swathe of its airtime to the eco-hippies.

Coverage of Lord Turner's report recommending further swingeing cuts in greenhouse gas emissions was focused almost exclusively on why it doesn't go far enough. Proceedings culminated in another wildly unbalanced Newsnight, where Turner was lambasted by Jeremy and his friend George (Moonbat to you and me) for bring such a wimp. Surely they said, unless we get on the case and ban everything, we're all going to die!

Yet when you read the 511 page report (OK, when you skim-read it), you find Turner has already gone a very long way to satisfy the hippies.

To start with, he accepts the doomsday global warming scenario itself. Clearly he had to, because otherwise he wouldn't have been given the job. But with Surrey having just experienced its first October snow in living memory, another Arctic blast on the way, early snow in the Alps, and the increasing evidence that global warming may have stopped, there are at the very least, serious doubts over the supposed timetabling of doomsday. Plus of course, the doom only actually exists in models, and as we all surely understand, models are never more than schmodels - especially when they have 50-200 year horizons.

Second, he accepts the traditional lefty argument in favour of unilateralism. Just like the old CND argument on nuclear weapons, we're supposed to believe that if we give up our power stations, cars, and foreign holidays, then a dangerous communist superstate will be so impressed by our moral authority, it will follow suit.

Third, he accepts a huge dose of hippy thinking on the feasibility of eco-friendly energy. For example, everything we've read suggests there are serious drawbacks with windpower, including the need for massively expensive back-up systems. And making our future use of coal-fired power stations conditional on somehow cracking the unfathomable practicalities of carbon capture and storage by 2020 is fantastically heroic/ludicrous.

Finally, there's the issue of cost. According to Turner, we could achieve his recommended 21% cut in emissions by 2020 at a cost of less than 1% in annual GDP. But that is highly uncertain, depending not just on technical feasibility, but also more mundane issues such as the capacity of the wind turbine industry to step up production and installation. In fact, when you wade into the report's small print, you soon find other estimates suggesting costs could easily be double Turner's figure.

And just for future reference, here is the report's comparison of current and assumed future electricity generating costs for different technologies:

As we can see, the much puffed wind power option is up to five times the cost of coal fired generation. Which puts Turner's assertion that under his proposals electricity bills would only rise by 25% into their proper context.

But the Turner report does at least point towards rationality, as opposed to literally a new dark age. Because Turner is talking the language of cost-benefit, rather than the absolutist drivel spouted by Monbiot.

In truth, nobody has the faintest idea what's happening to the climate. Sure, it's changing, but then, it always has been. And sure, burning fossil fuel sounds like it might be A Really Really Bad Idea, but then again, sailing off the edge of the known world once sounded similarly ill-advised. We just don't know enough to tell what's happening, and as far as I'm concerned, sacrificing our way of life on that basis is simply not a runner.

The sensible way of thinking about this is surely as an insurance policy. We don't actually know what's going to happen, but if the worst came to the worst, it would be a catastrophe. So how much are we prepared to pay to insure against a possible catastrophe?

Now if the cost genuinely was only 1% of GDP, then - rather to my own surprise - I for one would be prepared to pay it. We might compare it to the cost of home insurance, which currently costs the average household around 1-2 per cent of annual income.

But given all the uncertainties, and his own cost analyses, I'm not at all convinced we could deliver anything like Turner's huge emissions cuts for a mere 1%. In fact, just as with any sales pitch, the strong suspicion is that the costs have been massaged down so as to sucker us in.

I'd much rather turn it round the other way. Instead of starting from an entirely arbitary emissions cuts target and asking someone to work out how to deliver it, I'd like to know how much insurance cover we could get for say 1% of GDP. What could that buy us? What's the best bang for the buck?

With our economy crumbling, and the public finances destroyed, the last thing we need right now is to write yet another blank cheque. It would be nice if the BBC could temporarily pause its eco-propaganda campaign and bring us some real discussion on the cost of insurance.

*Footnote - Roger Harrabin's BBC report on the Turner Report has an alarming picture of planet destroying smoke billowing from one of Britain's disgraceful coal-fired power stations. If only we could be more like the green wind-powered Germans. Except... well, blow me down... the pic actually shows the Frimmersdorf power station in... er, Germany.

Killed By Box-Ticking

According to Children's Secretary Balls:

"When I met with the Chief Inspector this morning, she told me that in her judgement the failings in management, oversight and practice identified by the Inspectors’ report in Haringey are “exceptional”.

But does anyone believe that? Is it remotely plausible that these shocking failures are confined to Haringey?

Scanning Balls' summary list of shortcomings reveals issues we come across all the time on BOM. And not just in social services:

• Silo mentality - "Agencies acting in isolation from one another without effective co-ordination"
• Shambolic work practices - "Poor gathering, recording and sharing of information"
• Weak management - "Insufficient supervision by senior management"
• Lack of oversight - "Insufficient challenge by the Safeguarding Children Board to council members and frontline staff"
• Reliance on box-ticking - "Over-dependence on performance data which was not always accurate"
• Inability to learn - "Failure to implement the recommendations of the Victoria Climbie inquiry, which heavily criticised it five years ago"

These are issues that pervade the entire public sector. But there are reasons to think they may be particularly acute at the sharp end of social services.

Why?

Because by their very nature, the customers of social services are not the sort of people who can demand good service.

As we know, it's hard enough for the famously articulate middle-classes to get service out of their local schools and hospitals, but at least they know how to go about it. When it comes to social services, they don't even bother to try. Why should they? They're not big users. And that means there is no pressure for improvement from the customer side.

So how are social services kept up to the mark? Who checks on them? Who ensures they are discharging their responsibilities and takes action if they're not? How does the power work?

It's certainly not at the local level. As we've blogged many times, local councils are now little more than an executive arm of Whitehall. Balls's decision today to take direct control of Haringey Social Services is a particularly stark reminder of that relationship, but our councils are more financially dependent on central government than their counterparts virtually anywhere else in the developed world. And as always, power follows the money.

Which means that the natural tendency of local councils is to look up rather than out. The key thing for them is to convince Whitehall that they're doing the job specified by Whitehall.

But central direction is a terrible way of running local services. Not only is Whitehall woefully ignorant of the real life issues at the coalface, it's also far too distant to organise and manage local effort effectively. In practice, its management comes down to the familiar Stalinism of output targets and performance league tables (see several thousand previous posts).

A key element in any Stalinist system is the Government Inspector, and in this case, the Government Inspector is Ofsted.

We've been trying to access Ofsted's 2007 report on Haringey, but their site has mysteriously crashed (wonder why). Still, we do know that the report failed to identify any significant issue with the social service department. Indeed, it praised the council for providing “a good service for children”, and improving their "life chances".

We also know that the inspectors were led by Juliet Winstanley, who'd worked under the now sacked social service head Ms Shoesmith in a previous job. She said:

“Haringey Borough Council delivers a good service for children and young people... The number of children on the child protection register continues to decrease. Thorough quality assurance systems are in place and the number of re-registrations demonstrates effective planning for these children."

Given what had already happened to Baby P, it's sick.

Especially when we now hear that those comments were made not on the basis of a proper inspection, but on the basis of a box-ticking exercise, a so-called "self-assessment".

As we've blogged many times (and here on Haringey itself), these self-assessments are worse than a waste of time. All they really show is that the reportee has learned how to tick the right boxes, yet they are used to provide a false and dangerous comfort that everything is fine.

Ofsted now say they are going to step up real inspections and also make them unannounced. But once again, the real problem is over-centralisation of power, and the way that top-down Stalinist management structures undermine responsibility for delivering results in the real world.

So while Balls may have had no alternative but to seize control of hopeless Harringey, the only long-term solution is to return of power and responsibility back to the local level.

News From BOM Correspondents - 10

Recent news and links:

Council Tax

We're approaching that time of year again, and BOM correspondents are spotting some worrying signs.

Mr Brillo sends news from Telford, where despite an inflation busting 5.35% increase in their central government funding for next year, and the general deflationary environment, and the drop in VAT, the council is still intending to increase council tax. The council reckons it is "impossible for us not to raise council tax".

Mr B is understandably fuming, pointing out that:

"...this is the council that insisted that Penguins couldn't enter the public park without a CRB check and risk-assessment, and that targeted single men sitting eating lunch on the park benches, demanding to know why they were alone (see previous blog here). And they keep wringing their hands over town centre parking fees and telling people to go green or cycle, but that all council staff have free parking right next to their offices."

He should clearly vote for a Tory council.

Oh, Telford is a Tory council.

As is Ealing council, although evidently that hasn't stopped them wasting cash. KM highlights Around Ealing, yet another of those glossy local council puff mags, which reportedly costs £100 grand pa. He also picks up the ParkSmart leaflet (pic above):

"Over the equivalent of 4 sides of A4 this tells you how and where and when you may park your car and what all the associated road markings, signs etc. mean. This has been, I assume, delivered to every household in the borough! At what cost? Who knows? And since when has it been the local council’s job to educate the great British motorist about the Highway Code? And to do so regardless of whether I need to know – I don’t because I don’t drive! If I did drive, wouldn’t I have needed to know all this to pass my test?"

Gah!

But at least one council will be cutting council tax next year. Tory Hammersmith and Fulham will be cutting by 3%, the third year in a row of lower tax. How?

"More than £13 million of red tape is being cut in 2009/10 by reducing staff numbers, office space and making better use of IT... Cutting communication costs by £300,000 to the lowest levels in London... Cutting personal advisers to Cabinet Members - at an immediate saving of over £300,000 a year." (HTP JW)

Hurrah for H&F, and may we suggest Telford's councillors pay a visit.


£100 grand nurse

Tyler's mum was a nurse, and the deal was always that they earned a pittance but were viewed as angels. Now:

"AN NHS nurse has broken the £100,000 barrier for the first time as health staff cash in on generous incentive schemes.

The nurse consultant in Rotherham, South Yorkshire, has doubled her basic salary of £50,000 by working overtime under an NHS initiative to bring down waiting lists."

The Sunday Times report updates us on other high earners in the NHS. Many nurses now earn in excess of £60 grand pa, and many consultants are getting over £200,000.

Nothing intrinsically wrong with people earning such sums of course. But this article raises all the old familiar questions. Should nurses be employed as cheap consultants? Should they be able to double their incomes by working Gawd knows how many hours overtime? How have these huge increases in NHS pay delivered anything like sensible value to taxpayers?

(HTP scaredendoscopypatient)


£10m to get robbed

We've blogged before about how quangos spend our money getting us to hand over even more to them. Now we've got some figures:

"PUBLIC bodies are spending about £2m a year on political consultants to help them lobby ministers and MPs for more taxpayers’ money, it was claimed last night.

The close ties between state-funded quangos and the lobbying industry are disclosed in a dossier listing 71 separate contracts worth almost £10m over five years."

Even more jaw clenching is the stinking incestuous relationship between the lobbying industry and government:

"The biggest beneficiary is Weber Shandwick, headed by Labour’s former chief press officer, Colin Byrne, which has lucrative relationships with organisations including the Crown Estate, the Meat and Livestock Commission and the British Museum, worth a total of £1.8m over five years. The firm also employs Priti Patel, a Tory parliamentary candidate and former aide to William Hague.

Also profiting from quango contracts is Grayling Political Strategy, whose managing director, Tanya Joseph, is a former spin doctor for Tony Blair. The lobbying firm offers an “information, intelligence and advisory service” to institutions ranging from the grand, such as the Royal Mint, to the obscure, such as the Northern Lighthouse Board, whose beacons guard the coasts of Scotland and the Isle of Man."

It makes you want to throw up.

And to arm yourself.

(HTP John C)


£2bn loss on equity punt

Several correspondents have highlighted the £2bn immediate loss on the government's equity investment in RBS.

With the existing shares trading at 10p below the offer price for new ones, it was unsuprsing that we got stuffed with the new ones.

Not that it matters. The reality is that we're now underwriting the whole of Britain's banking system, with its combined balance sheet in excess of £6 trillion. What's a couple of bill compared to that lot?

The most important thing - as we've blogged many times - is that if we taxpayers are supplying the capital and taking the risks, then we taxpayers should reap the eventual rewards. And we're by no means convinced HMT is paying enough attention to that issue.

Job Stats Of The Damned

September 2008: the Great Helmsman brags to the Party Conference:

"It is not the arithmetic of statistics but the fabric of people's lives.

When we talk about three million more people in work since 1997 - that's not just a number, that's a life that's been changed - three million times over. That's the young woman laid off in the mid 90's who's now built a booming business of her own. Three million new jobs not by accident, but by our actions."

When it comes to statistical distortion, Brown has always plumbed the slithery depths, and his boasts on job creation are no exception.

In particular, he likes to suggest that the vast bulk of "his" 3m new jobs have come from Labour's super-dynamic post-neoclassically endogenised private sector - young women laid off by the evil Tories in the mid 90's who've now built booming businesses of their own. The jobs reflect Labour's success in revitalising the economy.

But it simply isn't true. In reality, most of the jobs are being paid for by taxpayers, and far from being a reflection of economic success they are a drain on Britain's wealth producers.

This week, the FT published a fascinating analysis comparing the growth of jobs funded by taxpayers with those funded privately (see here, here, and here - HTP HJ). In a stinging editorial they summarise:

"Two out of three jobs created between 1998 and 2006 have been in sectors dominated by public services: health, education, social work and public administration. Some of these workers - agency nurses, supply teachers and public policy consultants - may legally have private employers, but they depend on the state.

This should lead to a profound reassessment of New Labour's legacy... the surge in employment in the penumbra of the public sector, which between 1998 and 2006 has been 25 per cent or more in much of the country, is no recipe for efficient public services.

Whatever the merits of public sector workers, they are not an investment. They provide services that must be paid for, and in the coming recession it is hard to see how."

What the FT has done is to use figures from the Office for National Statistics' Annual Business Inquiry to calculate job growth across the main industrial sectors of the economy (the underlying stats are all available on the ONS website here).

Overall jobs increased from 28.8m in 1998 to 31.3m in 2006, a rise of 2.5m or 8.5%. But of that 2.5m increase, 1.7m came in industrial sectors dominated by the public sector, either as the direct employer, or the employer of subcontractors and temps - education, health, public administration, police, defence, social services, etc etc (Standard Industrial Classifications L-O).

Hence the FT's conclusion that 2 in 3 of Labour's new jobs are being funded by the public sector.

Or to put it another way, whereas public sector jobs have increased by an eye-watering 21%, private sector jobs have grown by just 3.6%.

And all too predictably, the growth of public sector jobs has been concentrated in LAbour's heartlands. The Mail picked up the story and produced this neat map showing the regional variations (private sector jobs growth on the left, public sector on the right):

Some pretty familiar features there, including - once again - munificent spending North of the border.

So against this evidence, why is it that Brown/Darling are constantly able to claim that most of "their" new jobs have been in the private sector?

The answer is that the official ONS count of public/private jobs uses a different approach. It concentrates on how many people public and private employers directly employ. And on that methodology, whole rafts of public sector workers are counted as being in the private sector.

For example, GPs are not directly employed by the NHS so don't count as public employees. University staff are also not counted because universities are supposedly "arms length". Contract cleaners don't count, even though they may spend all day "cleaning" NHS hospitals, or state schools. Agency nurses don't count, supply teachers don't count, etc etc. And Labour have made a speciality of moving employees off the direct public payroll, especially under the hopeless Gershon "efficiency" programme.

So the official ONS figures give a very misleading picture. In fact, if we didn't know better, we'd almost imagine they were being deliberately fiddled.

But there's something else even worse than the fiddling.

Although the FT report looks at the 1998-2006 period, the ONS numbers actually allow us to look at a much longer period, right back to 1978. And the overall picture is pretty shocking. (Yes, I'm sure there are a few statistical discontinuity gremlins lurking therein, but I'll bet the big picture is right).

Over the whole 30 year period, 1978-2008, the UK has created a net 4.8m extra jobs. But - and you'd better sit down - no fewer than 3.3m of them have been in these same sectors dominated by the public sector. So actually, that ratio of 2 in 3 new jobs being in the public sector is not just a NuLab phenomenon. It's representative of our entire post-70s history.

And that's pretty scary.

Because it suggests that even at the height of the Thatcherite adrenaline rush, job growth actually depended more on the public sector than the private.

Which means that looking forward into the gloom of our high debt, high tax, spending restrained future, there are going to be an awful lot of people without jobs.

We truly have been living a fantasy.

Chasing After The French Model

Strewth! She's even pawned her vest!

Something we've heard a lot recently is that borrowing half a trillion quid won't be a problem because it will only bring us into line with La Belle France.

Brown repeated it in this week's PMQs, and yesterday, Labour's Anatole Kaletsky wrote:

"Hysterical claims that Britain is on the brink of “national bankruptcy”, or that the Government has “run out of money” or that the pound is going the way of the Icelandic krona... are absurd. Britain's public debt-to-GDP ratio, at around 40 per cent, is the lowest among the G7 advanced economies and if it were to rise to 57 per cent, as suggested by Treasury projections, this would not present a serious problem. Nor would it drive up interest rates and inflation, to judge by the experience of Japan, Italy, France and Germany, all of which have public debt ratios above 57 per cent."

Of course, Kaletsky fails to mention that these oft quoted international debt comparisons are shot through with apples and pears problems (which is why the OECD attaches specific warnings of non-comparability to its figures, as we blogged here). And he fails to mention that HMT's UK debt projection omits hundreds of billions of off-balance sheet Enron debt (PFI, public pensions etc). And he fails to mention the trillions of contingent banking liabilities HMG has now assumed.

But setting all that aside, how reassured should we be that Japan, Italy, France and Germany have more public debt than us? Given that Japan has been stuck in a giant hole for nearly two decades now, Italy is... well... Italy, and Germany has never recovered from the dire fiscal consequences of its acquisition in the East.

Let's focus on our nearest and dearest cousin, France.

According to the OECD, in 2007, France's gross government debt was 69.4% of GDP. Ours was 47.5%, so on the face of it, we had a good 20% catch-up space. But note that because of definitional differences, the OECD's 2007 figure for the UK was already 10% higher than HMG's own official figure of 37%, which implies that HMT's official 57% debt/GDP forecast will take us right up to the current level of French indebtedness.

So how will that feel? Here's what the French Prime Minister said last year, even before the current crisis broke:

"I am at the head of a state that is in a position of bankruptcy. I am at the head of a state that for 15 years has been in chronic deficit. I am at the head of a state that has not once passed a balanced budget in 25 years. This can't go on."

Which doesn't sound altogether encouraging.

And neither does France's long slide down the international league table for prosperity: GDP per head is currently 7% below us, whereas a quarter century ago they were 10-15% above. In contrast, it has climbed up the table for structural unemployment (8% according to the OECD, compared to our 5%).

But it's on the tax front that the consequences really show. Whereas our taxes have been running at around 40% of GDP, theirs have been running at 50%. And part of that difference is accounted for by the higher interest payments they must pay on their higher government debt.

As we've blogged before, national bankruptcy can come in many different forms. At the extreme end we have the Argentine blow-out. But a long lingering death of high taxation and deteriorating public services would do just as well.

Already, the cost of issuing HMG debt is going up. Under the headline "UK and Italy struggle to entice investors" today's FT reported:

"The UK and Italy struggled to sell bonds on Thursday in a fresh sign of the difficulties governments are facing because of the debt needed for economic stimulus packages and bank recapitalisations.

The two bond auctions saw both governments forced to pay higher yields to attract investors and Italy scaled back the amount on offer.

Analysts say it is an “ominous” warning that debt raising is likely to become even tougher in the coming months if problems are emerging so soon after government announcements to increase issuance. A record of more than €1,000bn ($1,290bn) of debt is expected to be issued in Europe next year." (HTP Joan W)

And you know the really alarming bit? The market is bracketing us not with France, but with Italy. That didn't even happen in the 70s.

High Quality Crock

Not quite as advertised

Remember all those official assurances about how our £100bn would be safe with the Crock? The huge deluge of "comfort" from our rulers and betters that the guarantees would cost us nothing?

No?

Well, here's a reminder (and see all previous Crock blogs gathered here):

• FSA - "We believe [Northern Rock] is solvent, meets all capital requirements, and has a good quality loan book." (FSA chairman Callum McCarthy 17.9.07)
• Darling - "Bank of England lending is secured against Northern Rock's assets such as high quality mortgages, assessed by the Financial Services Authority as being of good quality" (21.01.08)
• Brown - "Most people agree that Northern Rock has a quite high-quality loan book and I can assure you that our aim in all of this is to secure the best deal for the British taxpayer." (20.01.08)
• Cooper (Yvette, not Tommy... or was it the other way round?) - the guarantees "have not been called upon, so they've not actually created any cost for the taxpayer"(18.2.08)

Wellwaddyaknow? The Treasury has finally admitted what we've all known for well over a year. With the Crock's mortgage arrears having quadrupled since December, its repossessions soaring, and 20% of its loan book anticipated to be underwater (ie negative equity) by next year, HMT minister Lord Myners now says:

"Foreclosures are higher in Northern Rock than in other mortgage lenders because its lending was more irresponsible. It is as simple as that."

A big round of applause for his Lordship: a Treasury minister recognising that truth is a first step to gripping the real crisis (NB Myners is new, so this may well be his first and last essay in candour).

But of course there's a much bigger issue now: whereas the Crock was a measily £100bn of exposure, we're now effectively guaranteeing the entire UK banking sector. And its liabilities weigh in at well over £6 trillion, including a very scary £3 trillion of foreign currency liabilities (ie the stuff HMG can't print).

So how good is their loan book? How good are all those impenetrable securities they've piled up?

I think we can guess the horrible answer.

Are We Bust?

He's after your wallet

On Monday, Tyler was so shell-shocked by the afternoon's financial revelations he went down with a nasty dose of something, almost certainly Publicus Debitum Gravis. But after he'd taken to his bed, Mrs T made the mistake of watching a late night horrorshow with Niall Ferguson. In graphic detail, the Prof described how a breed of reptilian replicant humanoids, known as politicos, routinely suck the lifeblood out of their innocent citizens, and if left unchecked will destroy the very fabric of civilization. Mrs T was scared to death.

In case you don't know it, the Argentine debt crisis is a hideous tale of grossly mis-managed public finances leading to ballooning public debt. Debt that spirals way beyond the long-term servicing capacity of the state. Hyperinflation ensues. Governments fall. The currency collapses, credit is cut off, and barter replaces cash. Nobody wants to hold the national currency and bank accounts are emptied. Then things get really nasty. In 2001, the Argentine government froze/confiscated all bank accounts. Riots in the streets. The economy died. Over 50% of the population sank below the poverty line.

Gulp.

And the Icelandic version of the tale may well turn out even worse - each and every one of Iceland's citizens are now liable for well over £100 grand of public debt, all denominated in foreign currency. There is no credible plan for repaying it, and Iceland's credit is effectively worthless.

Could it happen to us? asked an edgy Mrs T. Because if so, let's get the gold now and bury it in the garden. And buy some shooters.

A good point.

Then yesterday, longtime BOM correspondent HJ sent a link to a US consumer credit blog, which has calculated a startling comparison of indebtedness. Specifically, it has applied a standard consumer credit ratio - the ratio of debt to income - to the whole economy. It has worked out an "effective net worth per citizen", and it finds we are horrifically worse than any other major economy:

Now of course, we economic sophisticates could come up with all manner of arguments as to why the straight difference between external debt and annual income is totally meaningless. But in today's circs, we can't seem to think what the arguments are, mainly because we're spending most of our time in bed hiding under the duvet.

So what will happen? How on earth are we going to pay down all this debt?

I'll tell you - tax.

Tax, tax, tax, and more tax.

We will be working for the government's creditors. Just like after WW2. A new age of austerity.

And to get a sighting shot on how bad it will be, consider the Chancellor's own forecasts. Despite their ludicrous optimism, it turns out that half of the income growth he reckons we'll get post-2010 will go in tax. Bang. Just like that. He forecasts a c £350m pa increase in money GDP, and an increase in tax of c £175bn pa.

I've instructed Mrs T to stick to Desperate Housewives in future.

Time To Choose The Good Way

Are you sure this is the Good Way?

No blog yesterday - Tyler was too depressed by the BBC/C4 coverage of Monday's horror show.

They seemed to buy the government line pretty well whole: entirely out of the blue, those crazy yanks blew up the world financial system, and with it, the global economy. Brown/Darling have heroically launched a massive fiscal rescue package to reflate the economy and stave off another Depression.

All right thinking people like it. Bishop Snow likes it, and even had Victory posters of Gordo as Winston Churchill stuck up round the C4 News studio. Will Hutton likes it. Anatole likes it. Everybody likes it.

Except of course, the heartless Tories. And those selfish small traders who've spent the last two days calling radio phone-ins to whine about having to change a few price tickets and pay extra duty on diesel.

Yesterday, the IFS gave us some much more sensible analysis.

We won't dwell on the horror highlighted by their debt and borrowing analysis - BOM readers are only too familiar with that. But one point they make quite clearly is that even the government now recognises its public spending habit is totally unsustainable.

How do we know that?

Because they've been forced to accept spending cuts as the only realistic hope for reining in their massive borrowing.

As we know, the pre-election fiscal "giveway" so praised by Snow et al, is swamped by the fiscal takeaway/bombshell planned for later. According to the IFS, in 2012-13 the planned takeaway will be running at £22.5bn pa, or getting on for £1000 pa per household.

But the interesting thing is that most of that - £18.6bn - will come not from tax increases but from spending cuts (relative to previous plans).

Now, you might think that we'd applaud that, and in broad terms we do - our dire economic outlook means the need for growth stimulating tax cuts is greater than ever. But the way the spending cuts are being lined up is a re-run of every Labour public spending crisis we've ever had.

In particular, the heaviest cuts will fall not on day-to-day activities, but on public investment programmes - the very thing Brown has always slammed the evil Tories for.

As we learned during the Wislon/Callaghan years, in terms of value for taxpayers' money, this road is known as The Bad Way. It comprises successive waves of arbitrary cuts, starting with the easy ones like capital spending, and culminating in across the board percentage haircuts for all spending departments. Rationality goes out the window, public services get whacked, and taxpaying consumers pay the price.

But there is another way. It's called The Good Way, and now is the time to choose it.

The Good Way comprises the grasping of nettles. It comprises breaking up the big public service monopolies and harnessing choice and competition to drive improvement (see many previous blogs).

Why now?

Because right now, we no longer have that oh-so-seductive alternative of simply pumping in more cash. There is no more cash. And as we saw so graphically in the 70s and 80s, The Bad Way with no cash, is no place for anyone.

Blow-Out

57% will take us to a whole other level

Well, we knew it would be bad, but we didn't know quite how bad.

Despite some £6bn pa of extra taxes from 2010-11, Darling is forecasting a huge borrowing binge. As George immediately pointed out, in the next five years the government will borrow nearly £0.5 trillion, doubling the existing National Debt. By 2012-13, our official National Debt will be 57% of GDP, higher than at any time since the early 70s (and it was only that high then because we were still paying for WW2).

And remember that's all on top of the massive debt he's accumulated guaranteeing the banks, and it excludes all the hundreds of billions of Enron off-balance sheet items.

But the worst of it is that, even though Darling's projected borrowing is gob-smacking, he's only been able to keep it as low as it is by making some ludicrously optimistic assumptions on economic growth.

He's assuming an extraordinarily mild recession, with GDP falling by only 0.75% cumulative this year and next. That's much less than it fell in the last two recessions, and they didn't incorporate a global financial crisis. Even whackier, he's assuming growth then returns to an average 3%pa from 2010-11 onwards - which is actually higher than he assumed in his last forecasts.

It is pie in the sky.

And he's no better on public spending. Not only is he assuming another £5bn pa of those non-existent Gershon "efficiency savings" (see many previous blogs), he's also claiming he'll restrict public spending growth to 1.2% pa in real terms. Given that he'll be dealing with much higher unemployment spending, it will be fascinating to see what he plans to cut... and how he plans to locate some backbone.

We'll post again once we've had a proper look at the report. But this is a bad news budget that's actually even worse than it looks.

Bad News For Moggies

Carry me to my car Miss Jones

This afternoon Old Labour will update us on their definition of fat cat. Reportedly it's anyone on an income over £150 grand pa.

Quite coincidentally, the TPA has just published this year's Public Sector Rich List. And as you may recall, £150 grand is also the entry point for inclusion there.

This year there are 387 assorted quangocrats and public sector bureaucrats earning above the magic number (excluding Town Hall officials who have their own separate list). That's up from 300 last year. As a group, their pay has been increasing by 11% pa, and the top package is now £1.24m pa (the head of Network Rail).

But at least all these people now face the tax on fat cats.

You couldn't ask for a clearer acknowledgement of just how badly Labour has bogged up public sector pay.

Undermining The Future

So it's goodbye to New Labour. The leaked increase in our top marginal tax rate will only raise about £1-2bn pa of revenue, but the message it sends is much more significant.

Despite a mass of evidence to the contrary (see many previous blogs), Labour has never believed that lower taxes lift economic growth. And they have certainly never felt comfortable with Lawson's 40% top rate for the "super-rich". As far as they're concerned, if anyone flees the country just because they have to shoulder a fairer share of tax, good riddance, because they're not people we want here anyway.

The 2011 increase to 45% will lift our combined top rate - including the employee National Insurance contribution - to 46%. Which is almost exactly in line with the current OECD average of 46.2%. But that doesn't mean we can get away with it:

• The trend among most OECD competitors is down
• Tax levels in many of the big emerging economies are much lower than in the old OECD

The big picture is that under the cover of a reflationary budget, Brown is unpicking even more of his Thatcherite supply side inheritance. It's back to good old "Keynesian" demand management, the very thing that failed so catastrophically in the 70s.

There's a very real question as whether the fiscal boost will actually work in the short-term, given that we are all being told we'll have to pay it back in a couple of years. But in the long-term it will leave a legacy of high debt and high tax that will undermine our prosperity for years to come.

Just like Old Labour always did.

PS If you've got any spare cash at all, you should put in a bid for the final remnants of the Georgian silver and Canaletto collection Brown will be auctioning off. For obvious reasons, bidders for the new wave of asset sales will be thin on the ground, and Brown is a desperate forced seller.