How The Poor Got Richer

They've never had it so good

You'd never guess it from the constant wailing of the poverty lobby, but over the last half century the poor have got a whole lot richer.

A standard measure of poverty is net income of the poorest 25% of households (specifically, the bottom quartile point). And as it happens, the Institute for Fiscal Studies have recently published a compilation of the official figures going back to 1961 (obviously it's far too much to expect HMG to publish its own compilation). They have helpfully adjusted the figures for inflation so we can see the underlying trends in real income.

The figures show that the real income of this poorest group has approximately doubled since 1961, an average annual growth rate of 1.4% pa (ie the growth in income at the bottom quartile point).

In fact, it turns out that in real terms the bottom 25% are now considerable richer than were the top 25% in 1961*.

Just think about that.

Tyler remembers 1961 very well. His family were most definitely not in the top 25%. They had no car, no TV, no phone, no fridge, no central heating, and certainly no foreign holidays. Yet in truth they did not consider themselves poor. His father was earning the average national wage in manufacturing (£16 pw), and the Tylers were all housed, fed, and clothed. Not what anyone could call dollar-a-day out and out poverty.

But the top 25%, wow, they were living the life of larry:




So what we're saying is that the bottom 25% today have a higher real income than those people in the 1961 Saab 95.

How on earth can that be called poor?

As we've blogged many times, poverty as defined by the poverty lobby and the government today is miles away from what most of us actually think of as poverty. Today's poor have material resources way beyond those of the affluent middle classes back in the days of SuperMac and never had it so good. And even further beyond what Tyler and millions of others knew as children.

Ah yes, I know - the world has changed since 1961. Everyone's so much richer today. Virtually every household has a telly, a fridge, a telephone, and central heating. 75% have a car. Having those things may have made you rich in 1961, but these days it's a given. You can have all of that and still be poor.

Except of course, you can't. If you're housed, clothed, fed, and in possession of a fortune in consumer durables, then sorry, you are not poor. By both historic and international standards, you are in fact pretty rich.

And as Iain Duncan Smith sets about his much heralded welfare reform programme, he needs to remember that. Poverty in Britain was conquered long ago.

Yes, there are plenty of people who live sad dysfunctional workless lives. But that's nothing to do with lack of material resources. That's to do with poor education, destructive personal behaviour, and our grotesque level of welfare dependency. None of which will be solved by yet more welfare cash.

Which is why we have long argued for reformulating our definition of what constitutes poverty. Ideally, we'd like to switch to an absolute standard of poverty such as they have in the US. But if we have to stick with a definition measured relative to median income, we'd settle for dropping the current poverty line at 60% of median income, and switching to a 50% line.

Why?

First, because we estimate it would save £20-30bn pa from the current welfare bill. And second, because it would increase the attractiveness of work relative to welfare (ie it would make the poverty trap problem a whole lot easier to solve).

And as it happens, Tyler has recently been working on a TPA paper on precisely this issue - watch this space.

*Footnote update - Tyler has quite rightly taken to task for slack use of statistical terms in this post. Matthew T has spotted that our figures for the bottom 25% and the top 25% relate not to the average income of those two segments of the population, but to the quartile points - ie the income of the 25/100th  household in the distribution. So all we're showing is that the 25/100th household in 2008-09 is now richer than the 75/100th household in 1961. It's a fair cop, but we'd argue the 25th percentile point is still a widely used "breakpoint" between the poor and the not poor. We'll do some more digging within that bottom 25% when we have a moment.

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How To Rebalance The Economy

Set my people free

Yesterday Cam gave his first major speech on the economy as PM. It contained much that was good: cut the deficit, cut red tape, stabilise the banking system, improve our schools, reform welfare to make work pay, fight protectionism.

Yes, a big tick for all of that.

But his speech included another bit. One that we're not nearly as comfortable about.

It starts off fine:

"Today our economy is heavily reliant on just a few industries and a few regions – particularly London and the South East. This really matters. An economy with such a narrow foundation for growth is fundamentally unstable and wasteful – because we are not making use of the talent out there in all parts of our United Kingdom.

We are determined that should change."

Yes, good - we all agree that must change. Our depressed regions have remained depressed for far too long, and we have always believed they have huge potential (eg see our posts on the city by the bay).

But it's Cam's next bit that makes us wince:

"That doesn’t mean picking winners but it does mean supporting growing industries – aerospace, pharmaceuticals, high-value manufacturing, hi-tech engineering, low carbon technology. And all the knowledge-based businesses including the creative industries...

An early task will be to reform and refocus regional support and the RDAs. And Yorkshire is a priority...

Support from government, civic leadership, business investment and expertise – this is how we’ll help to rebalance our economy across the country. And there really shouldn’t be any limit to our ambitions.

Let’s make Humberside lead the world in carbon capture and storage. Let’s make Bristol a centre for marine energy parks. Let’s make the Mersey a global trading centre once again..."

Oh, Dave. You're sounding soooo horribly familiar.

It's H Wislon with his catastrophic Selective Employment Tax to boost manufacturing, Heath with his expensive lame ducks waddling themselves onto the public payroll in the name of industrial policy, Uncle Jim with his zillions poured into hi-tech industries of the future scrapheap (see this blog), and even St Maggs with all that cash poured down the gullet of BL. And as for Brown with his money burning Regional Development Agencies, R&D tax credits, etc etc, we don't even want to remember it (and er, Dave... weren't you going to axe the RDAs at one point???).

But look, Mrs T has given Tyler strict instructions not to carp until at least we've seen the budget. So we won't.

Instead, let us praise Cam's good intentions, and his sincere wish to help the regions. And simply make a helpful suggestion.

The best way to help our struggling old industrial cities would be to set them free. Slash taxes and regulation and watch private sector entrepreneurs do the rest. Instead of some hugely expensive and ultimately doomed attempt to force Hull into being the world leader in carbon capture and storage, set the city free. Give it charter status and watch it go. As we blogged in February:

"Given its prime location facing Europe, we've long believed Hull has huge potential, and yet it has failed dismally to exploit it. Suppose it became our own version of a Charter City - minimum wage and working hours regulations abolished, social benefits for working age citizens abolished (maybe a 5 year phased withdrawal), central government economic and planning and regulations abolished, no more central government development assistance but a 10% flat rate income tax, 10% Corporation Tax rate, and no capital gains tax.

Public spending as a percentage of GDP would obviously fall sharply, and those that depend on public spending would certainly feel the squeeze (although social welfare recipients could be given the option of staying on benefit if they relocated outside the City). But against that, Hull would attract entrepreneurs and private investment on an unprecedented scale - and with its easy European access, much of the inflow would come from overseas. There would soon be jobs for all.

Yes, yes, of course. We can't do it because of the 53rd EU Directive on not doing stuff. And there's also the question of human rights. And anyway, we might end up with all kinds of Coketown beastliness, and children being sent down the mines. And... well... anything might happen... it's impossible to predict.

Yes, yes, we know all that.

But have you ever been to Hull?

Do you honestly think faster trains and better broadband are the answer?"

Please Dave - think radically. The people trapped in all those bombed out places far from Notting Hill deserve it.

PS As for Laws, just how depressing is that? Here's a guy who seemed a perfect example of cometh the hour cometh the man. We've been hugely impressed. And now we find he's just like all the rest. I'm frankly amazed he says his cover-ups and lies were because he didn't want the world to know he's gay. I thought the world already knew - we certainly all did. And nobody cares about it one way or the other. But what we do care about is him wangling his expenses. Depressing.

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New TPA Vid

To coincide with this Year's Tax Freedom Day - the day when Britain stops working for the government and starts working for itself - the TPA has launched a new vid showing how the tax burden grinds down one young worker.

Starting work at 9am, it isn't until 1.21pm that he's earned enough to pay off the government. Only then is he free to work for himself.

PS Don't believe the TPA's numbers? Tyler is 100% confident they are spot on - largely because he was the one who calculated them. And in truth, he'd have gone further. Because if you add in the government's borrowing - which after all, is nothing more than deferred taxation - you find that our typical worker is still working for the government right up to 3.10pm (assumes 30 mins lunch break). Is it any wonder everyone's so stressed at work?

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This Is Not Just Sexism, This Is M&S Sexism?

Big or small. We like them all. At M&S you'll find beautiful bras to fit all sizes, at gorgeous prices. If nature has blessed you with more than your fair share, you certainly won't be charged extra for it. That big boob is all in the past. Bra £18. Knickers £8.

If you're going for "clever" it's better to be really knowing and consider what an impersonal body and double-entendres actually say to a customer who's also been exposed to ideas such as the campaign for real beauty and whom you're hoping to make feel good about themselves. Or perhaps I'm wrong and it's all good fun.

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WTF Do They Think They Are?

By far the best QT ever

We try to stay off the BBC - no, really, we do - because it pushes our blood pressure into the stroke zone. Which is why we also steer well clear of Question Time.

But last night Newsnight led with the same lengthy tabloid report on the murdered prostitutes (sorry, "sex workers") we'd already seen about 20 times elsewhere. So we flicked across to QT. Just in time to see one of the Lord High Dimblebys passing judgement in a serious case of contempt of the BBC.

It seems the new government had had the temerity to refuse to provide a cabinet minister for throwing into the pit. Not unless the BBC replaced the odious and never elected Ali Campbell as the Labour fighter with a proper Labour front bencher.

Puffing himself up to his full height, Bimbleby intoned that that Question Time "expected" to have a government minister dancing attendance, and that it is up to "us on Question Time to decide who should be on the programme not Downing Street".

WTF?

These arrogant cosseted people are employed by a £3.5bn quango that increasing numbers of us simply do not want. Their agenda is unremittingly that of the Guardian and points left. They are a major statist roadblock to the kind of progressive reforms we would like to see.

QT itself - which incidentally normally attracts well under 3m viewers - is a bearpit with a packed audience of young lefties. Campbell is a notorious spinner of untruths who has done more to undermine confidence in our political system than any number of duck islands. WTF would any sane Tory cabinet minister volunteer to enter such an arena?

The Major has long argued that the next Tory government should deal with the £3.5bn pa BBC. Ideally, the whole shooting match should be broken up and privatised. Failing that, it should be hacked back to one TV channel and one or two radio channels, funded out of general taxation rather than a ring-fenced tax of their own.

Meanwhile, our new government should be much more selective in taking up requests for ministerial interviews. They should say yes to Sky and ITV - who are both far more balanced in their approach - and no to the ritualised abuse handed out by the likes of Dame Paxo. Let's see how the BBC likes that.

PS Apologies for no blog yesterday. I actually intended to blog Iain Duncan Smith's much trailed welfare speech. Unfortunately, the accompanying paper contained little that is a new - it's more a restatement of the problem. Instead, we'll take a look at the National Audit Office Report on Labour's Pathways to Work programme introduced in 2003/04 to cut numbers on incapacity benefits. The NAO reckons it's given “poor value for money”. It said that private companies and charities hired to deliver support to get people off incapacity benefits had “universally under-performed”, delivering results no better than those achieved by job centres. It said Pathways “had had a limited impact and, while a serious attempt to tackle an intractable issue, has turned out to provide poor value for money”. Getting ripped of by private sector welfare-to-work providers is a real issue with these schemes, so the full NAO report will be worth a read. We'll report back.

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OECD Tells George To Brace Up

That's where 13 years of Labour leaves you

The OECD published its six-monthly World Economic Outlook today. And you know what? It's not all bad news.

They say that world growth is picking up faster than they expected last time, and it's been driven by China and the other emerging economies, rather than by yet more fiscal blow-outs here in the West.

So world trade is picking up again, and basket economies like the UK have a real chance of earning their way back to solvency.

Right, that's the good news over with.

The bad news is that when it comes to government borrowing we are still the worst economy in the whole of the OECD, bar Ireland (see chart above). The OECD forecasts that HM Government will borrow 11.5% of GDP this calendar year, and a further 10.3% next. Which compares with the laughably optimistic figure of 8.5% forecast by Darling for 2011-12.

The OECD's assessment?

"A weak fiscal position and the risk of significant increases in bond yields make further fiscal consolidation essential. The fragile state of the economy should be weighed against the need to maintain credibility when deciding the initial pace of consolidation, but a concrete and far–reaching consolidation plan needs to be announced upfront. While monetary policy should remain expansionary over the forecast period to support activity against the background of low levels of resource utilisation, the process of normalisation of interest rates needs to start soon in response to the expected gradual rise in underlying inflation."

Translation: public sector borrowing needs to be gripped soonest; George needs to announce a quantified plan for getting the public finances back in the black and keeping them there (aka a new set of explicit fiscal rules); the Bank of England needs to increase interest rates now before inflation balloons completely out of control.

Oh, and George will also need one of these:

PS The more we hear and see of young Mr Laws, the more impressed we are. We thought he was pretty good under fire in the Commons today, and in matters fiscal, he seems a whole lot drier than many a Tory front bencher. Hopefully he'll provide some much needed resolve when the shooting starts for real. We like him.

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Tackling The Welfare Problem

"My Government’s legislative programme will be based upon the principles of freedom, fairness and responsibility...

The tax and benefits system will be made fairer and simpler... People will be supported into work with sanctions for those who refuse available jobs and the timetable for increasing the State Pension Age will be reviewed."

Thus spake Her Majesty today.

As we mentioned a couple of days ago, the welfare bill is now running at £200bn pa, around 15% of GDP, and increasing rapidly. The chart above shows how it has soared over the last century since the Liberals began the huge expansion of welfare just before WW1.

And under successive governments since then, it's grown into a serious problem. The blunt truth is that we can no longer afford it, and Dave is quite rightly set on cuts.

But what cuts? And how can we cut without having people starve in the gutter?

Here's how that £200bn breaks down between the three key "client" groups (2008-09):

• Old people - £90bn, mainly in the shape of the state pension.
• Sickness and disability - £40bn, including the 2.5m people of working age who are on those notorious incapacity benefits.
• Families and children - £30bn, plus another £20bn in the form of tax credits which also largely goes to them.

The remaining £20bn goes mainly on housing, spread between all three groups. Unemployment support comes in at just £5bn - the rest having been redefined as something else.

So what to cut? In truth, there are no easy answers, and there will inevitably be losers. But the current level of welfare benefits is targeted on 60% of median income, which is now around £23,000 pa*. By no stretch of the imagination is that starving in a gutter, and given our dire fiscal straights, a 60% target is no longer sustainable.

And all those old people are going to have to be even older before they can retire. Given their increasing tendency to have 100th birthdays, the state pension age is going to have to rise to 70 soonest. Because if Her Majesty can still work at 84 - and wear that huge crown - working to 70 without the crown ought to be a breeze for everyone else.

The poverty line redrawn at 50% of median income; state pension age raised to 70; and forced sterilisation for anyone who has children they can't afford to support. Well, no, OK, the last one was the Major's and might not make it through to the final programme.

Nobody would start from here, but Dave does sound like he might be ready to take some real decisions. Let's hope he gets on with it.

*Footnote - The government's poverty benchmark is median household net income on an equivalised basis. Que? That's median household income, adjusted for household size and composition (equivalised), net of income tax and National Insurance, and gross of social security receipts (for more detail see here). Gross of social security receipts? But surely that means the target is chasing its own tail, and the higher the government makes social security, the higher will be the poverty benchmark, and the higher will be social security payments to close the gap, and the greater will be the cost. Well, yes, that's right - it's one of the very many bonkers features built into our current system of poverty relief.

PS So what does the Imperial State Crown actually weigh? An incredible 32 ounces. All set with 2,868 diamonds, 273 pearls, 17 sapphires, 11 emeralds, and 5 rubies.

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Unthinking Marketing.

A little knowledge is a dangerous thing. Never more so than is exemplified by the recent trend for medical research to be condensed into simplified blurbs that are reprinted in mainstream media in an effort to drum up publicity. The supposed findings are recalled while the underlying research is ignored.

As marketing increasingly draws on neuroscience and other academic areas, there's a real danger of the same thing happening. Witness the recent tweetstorm about a study in the Journal of Consumer Research and the blogpost about it here. The headline thought that will get marketers overly excited is encapsulated in this statement from the actual paper.

"The participants were unable to recognize that a particular brand had been paired with either negative or positive images. Therefore, we were able to create an 'I like it, but I don't know why' effect,"

That's fine by me. It's another in a long line of academic studies trying to understand the way the brain processes rational and emotional inputs and I'm sure the authors make no more claims for it than that. My concern would be that marketers would leap on it as justification for all sorts of misjudged campaigns simply because they appeal to the emotions without looking at the methodology.

I'm not denying for a moment that low involvement processing hasn't been proven to exist. I just draw different implications from the study. Firstly, it seems to me that the implication is the biggest ad budget wins because it is that which buys you the greatest number of exposures of associations of your brand with goodness. That's hardly mould-breaking.

Secondly, the study comparison was between "good" brands and "bad" brands but in real life you're not going to see many direct associations of badness with brands - even given the possibility of negative advertising. The real life comparison that buyers make is one between an array of brands all claiming goodness. So, to be seeking the title of "most good" may not be much of a differentiator even if you attain it.

If a study could reproduce the results, while comparing paired brands that only had different degrees of good words associated with them (rather than good versus bad), then that would be really interesting.

It's the sort of next level study that will happen, but unthinking marketers won't be waiting for it. They'll already have shown their "scientific justification" presentation slide and be spending the budget in pursuit of this latest meme.

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Absolutely Free

Free fountains for all

On BBC R4 Today this morning they discussed the imminent move by the Times to charge £1 per day for access to its online edition. You and I know there's no way we'll now start paying for Finkelstein and the rest of the Times output, and the BBC clearly agrees. Which will be great news for the BBC themselves, whose audience/readership should get a big boost. As Evan Davis chirped in his link to the subsequent item: "here's a review of the papers, and it's absolutely free".

Yes, ladies and gentlemen, absolutely free.

A single phrase that precisely captures the BBC's approach to public spending. Public spending is free, so cuts must be a bad thing. More is good, and less is bad.

Yesterday's Newsnight was a classic. It kicked off with their Trotskyite economics editor frowning his way round Westminster, and telling us how the cuts will bring massive job losses (he's clearly cranking up to announce the final crisis of capitalism). That was followed by a lengthy report from a sun-drenched Sheffield, where billions have been spent on public sector jobs and those arty fountains that spurt up unexpectedly from pavements for drunken unemployed teenagers to run through (vid). The message was the same - the cuts will extinguish the sun, destroy this city, and destroy these vulnerable lives.

Not once did anyone mention that fact that all those jobs and pavement fountains are not actually free, but have to be funded by taxpayers. That the cuts are not being made for fun - some evil Thatcherite whim to punish the poor - but simply in order to get the books back into some vague approximation to balance.

No mention of the fact that spending money on things that cannot pay their own way means taxing things that can. And that when you tax those things, you weigh them down and make it more difficult for them to succeed. Or that returning to prosperity depends on stimulating the things that can pay their own way - ie the private sector chasing private profit.

Of course, the tax-funded BBC doesn't have to worry about such tiresome details as paying its own way. They get £3.5bn from us whether or not we like what they produce.

Which means they don't have to charge for use.

But free it ain't.

PS As we've said many times, for those of us who believe in smaller government, the BBC is a major roadblock to progress. Like all the big public sector institutions it is impossible to reform, so breaking it up is the only option. Some had hoped that a Tory victory might have secured early action, but there's not a prayer now. We'll just have to keep plugging away for a brighter tomorrow.

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A Decent Downpayment

No wonder they always wanted him to join the Tories

You'd hardly know it from the BBC and C4 News, but the Osborne/Laws £6bn cuts represent a really decent start in rescuing us from Labour's fiscal catastrophe.

Even more encouraging, many of the cuts have been lifted straight from the TPA's list of recommendations. In fact, adding up list, we reckon almost £5bn of the £6bn came from the TPA/IOD £50bn cuts proposals published last September. Which means they've still got another £45bn's worth already identified and ready to roll.

Naturally the BBC and C4 line is that the cuts will cost countless thousands of jobs, and risk plunging us into the Great Depression Mk II. C4 even ropes in notorious left-wing economics campaigner Danny Blanchflower as support.

But as we've blogged many times, the real risk we face is that the markets lose confidence in our resolve to tackle the deficit and ramp up our borrowing costs. And on that score, the Osborne and Laws show is proving a real hit. In fact, since that post-election sweat when it looked as if Brown might somehow cling on, the market has reduced the rate at which it will lend to HMG (25 year gilt yields are down by almost 0.3% to 4.2%).

Yes, of course, £6bn is a drop in the ocean. But we do need to give credit where it's due. And this does suggest a serious resolve.

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Taking Arms Against A Sea Of Waste

£150 to you

George's Treasury has apparently put together a waste dossier.

We say apparently because, although it has been sent to all the important journos, it has not been officially published so we humble taxpayers can take a look for ourselves - so much for the promised public spending transparency.

Anyway, the S Times reports its copy thus:

"A Treasury audit of Whitehall spending, which was carried out over the past week, has revealed how officials spend £125m a year on taxis, £320m on hotels and £70m on flights.

The audit also reveals that the government spends £580m a year on office furniture, £1 billion on advertising and £700m on other marketing and media.

[The] audit has revealed widespread waste where different British government agencies operate out of separate sites in the same city. For example, £20m could be saved by merging four offices in Abuja, the Nigerian capital, occupied by the high commission, the Border Agency, the Department for International Development and the British Council.

Even ministries whose overall budgets will be ringfenced are having to find cost savings, which will be reinvested in frontline services. The Department of Health, for example, is expected to end its £275,000 funding of dance classes and competitions."

Which all sounds like stuff that really must be chopped. So good.

And in truth, BOM readers don't really need to see George's report on waste - we've been tracking this stuff for years. We've also had access to regular input from actual real live public servants, some of whom - it may surprise you to hear - are just as appalled as we are about how taxpayers' money gets squandered.

As it happens, one emailed last night. We're witholding his ID, but he says:

"I work in a government department and cannot believe the amounts of money being spent. For example we recently had to convert a small office and a small store room in to a single conference room. It required the removal of a partition wall, a bit of paint and a bit of wiring. It costs £250,000.

This week we found out that the little metal "desk tidies" that we use to file forms, etc on our desks cost £200 apiece, and every desk has two of them! How can they cost so much?

A bolt was fitted to our finance office door - a basic bolt, nothing more than what you would put on a shed. The cost? £150!

Then we had to refit a floor of another office for new claims (because of the recession). The total floor space was probably (and I'm estimating) around 1100 sq ft. A bit of paint, about a dozen desk and dozen computers. Cost, £1 million. How? [For a clue see this blog]

My problem with any new government is they'll appoint people at the very top who know nothing about the workings of their departments. The frontline do know how money can be saved, but I am in a minority of those people who realise and accept that massive savings can be made."

Our correspondent has just put his finger on something very VERY important. The truth is that most of our government bosses don't have a clue what's going on below decks.

Consider.

George certainly wants to cut waste - of that there can be no doubt.

But so did Darling.

And so did Brown before him.

And Clarke before him.

And Lamont before him.

Etc etc.

The trouble is, they don't really have the knowledge to do it.

Even worse than that, big government is by its very nature wasteful (see this blog for how the Clerk of the Acts to the Navy Board found things in 1662).

Which is why we believe the only long long-term solution to government waste is to break up government itself. Choice and competition are key to managing waste.

Bosses need to be driven to investigate what's happening below decks by the sure and certain knowledge that if they don't, they will be swept aside by competitors whose bosses have.

Yup, I agree. We can't do that for defence, or law and order, or a few other things.

But we can do it for education.

We can do it for healthcare.

And we can do it for a bunch of other public services.

And we should.

PS When George announces his £6bn immediate waste savings tomorrow, we'll be checking them off against the TPA/IOD list of spending cuts published last September. You might want to do the same (see this blog).

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1000 True Members.

It's strange how the online message of personalisation and focus has failed fully to permeate the offline world. Back in 2008, Kevin Kelly explained how to build a business on the back of 1000 True Fans and everyone knows the cost of acquiring a new customer to be greater than retaining an existing one.

And yet, we have bad health-clubs. Health-clubs that provide loss-leader offers to get you to join up and then rely on inertia-selling to keep you paying rather than nurturing you. Health-clubs that don't reduce their charges during hot, sweaty low-attendance summer months. Health-clubs that assume your loyalty until it's lost.

No wonder they have a churn business - they assume that's the business they're in and do nothing to rectify it. They don't reward loyalty, they don't keep in regular touch throughout membership and they don't offer new tailored services that might build that loyalty.

Recently, I happened to see a letter that my gym sends out a few weeks after a member has quit. It expresses disappointment at their absence and then lists a lot of amenities they are improving. Worst of all, the letter provides incentives to these leavers that are not offered to existing or renewing members whose loyalty gets them nothing. Though, only nosey ones like me know that. It's all about the gym and nothing about the ex-member.

That's inevitable because there has been no examination of why they left - no requirement in the quitting process to offer an explanation or provide an opportunity for remedy.

That's inevitable because there's no tracking of members whose attendance is diminishing and asking them why before they cut the knot.

That's inevitable because they believe that could alert the member to the money they're wasting as a high-profit, low-usage member.

It's all inevitable because it is company policy, the policy of a company with tens of thousands of members to track and analyse in the aggregate rather than think of them as discrete units.

It's a lesson that's not just applicable to gyms and membership. If you're lucky enough to have more than 1000 users, then just as Gore divide their employee groups into efficient maxima of 150, then surely you can divide your customers into subsets of 1000 fans and treat them like family? Or you can be in the churn business.

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He Is Heavy. And He Ain't My Brother.

1. The beer case for welfare

2. The power of real brotherhood

Listening to the appalled German taxpayers wailing over Merkel's Greek Euro bailout, you can only thank your lucky stars we had the quite marvellous Mr Gordon Brown to keep us out. If it had been left to Bliar, Clarke, St Vince, and the BBC, we'd now be in the Euro and as stuffed as those North Rhine Westphalians.

German taxpayers have also worked out something their politicos won't yet admit - any bailout will simply be good money chucked after bad. There isn't a prayer the Greeks will suddenly become good Lutheran hausfraus, tightening the family belt to live within budget.

And remember this - German taxpayers have recent experience of just how expensive this kind of support can be. The cost of German reunificiation is now put at 1.3 trillion Euros, which was getting on for one year's GDP when the Wall came down. That was much more than originally suggested by the politicos, and in one way or another, most of it came from West German taxpayers.

There was considerable anger about that as well. The industrious Wessies were not at all happy to find themselves milked for years to support the idle Ossies.

But of course there was one gigantic elephant size difference from the present situation - the Ossies were fellow Germans (or as the Major would put it, fellow members of the Master Race). There was a powerful bond of history and culture. They were brothers.

We're not in that situation here. Northern European taxpayers are not going to stand funding a permanent welfare regime for the South. Yes, of course, the political euroclass are wedded to ever closer union, and may even welcome the idea of binding in the PIGS via permanent welfare dependency. But sooner or later, their taxpaying voters are going to rebel. And as things look today, that might be sooner rather than later.

Which brings us to the fascinating session Tyler had with a group of Tory activists last evening. It was a political discussion group, and on the table was the small matter of how we're going to solve our own fiscal crisis.

We spent an hour and a half running through all the main options, and you know the one that generated most interest?

No, it wasn't abolishing quangos. Or cutting public sector pensions (although that did feature). Or scrapping the NHS supercomputer. Or even leaving the EU (although that too did feature).

The single most popular idea was fundamental reform of the £200bn pa welfare system (that's reform as in cutting expenditure). Discussants raised all the various issues we've blogged so often here on BOM - benefits that are so high they are a disincentive to work - even in a high employment town in Surrey - the unfairness of benefit families being able to furnish themselves with 50 inch plasmas that their working neighbours cannot afford, the housing priority given to people who won't help themselves, the ludicrous overpaying for private rental property via housing benefit (the local premium is reckoned to be c20%), etc etc.

Most of all there was a feeling that those who work hard and pay their taxes are being taken for a ride. Nobody minds helping those who genuinely cannot help themselves, but we've drifted far beyond that. As one member of the group explained, benefits are far too high because we've been duped by a bunch of self-serving left-wing politicos who, once real poverty had been conquered in the 50s, invented the concept of relative poverty to save their own political skins. And he should know- he was once a member of the Communist Party.

Who then is my brother?

Well, my brother is my brother, obviously. And most of us feel a natural and strong obligation to help a real brother in trouble.

But the Greeks?

Well, no not really. Sure, they're perfectly nice people, and if they got whacked by a natural disaster, we'd all put our hands in our pockets - there but for the grace of God, etc. But a fiscal crisis caused by years of living too high on the hog, maxxing the credit cards and fiddling the bank statements? That's not something Tyler feels terribly inclined to help with. Lessons have to be learned.

The Germans? Well, we laughed as we listened to some stern looking German politico last night warning that if we don't help them with the bailout costs, it will be the worse for us if we ever need help. We were remembering the last time we wanted their help during the 1992 currency crisis and how they told us to get stuffed (even though as things turned out they actually did us a gigantic unintended favour - see this blog).

Once again, the Germans are perfectly reasonable people, they make excellent cars, and they are people with whom we can very confortably do business. But when it comes to subsidising them, they ain't any brother of Tyler.

Which just leaves those we subsidise and support here at home. Are they our brothers? And even if they are, are we really helping them by incentivising them to spend all day having kids, drinking loss-leading lager, and watching Trisha on the 50 inch?

Tricky.

But probably not that tricky.

What we desperately need is that much promised root and branch reform of welfare, now being steered along by Iain Duncan Smith. Not only should it reduce the weight of all our brother support, but crucially, it must provide some real incentive for the brothers to rise from their butts.

PS Yes, I am quite aware that this kind of thinking is what got the nasty party its name, and I'm not imputing any of these views to party members past or present. Other than Tyler and the Major, that is.

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Elephants' Graveyard.

All over central London, 250 elephants are blending into their surroundings. This one is in Carnaby Street, the one below is in Golden Square. They surprise people. They delight people. Whenever you chance across one you see people staring, smiling and posing for photos.


Serendipity and joy combined. That's just what the marketing doctor ordered right? So I feel a little churlish noting that when my abiding reaction is that of a missed opportunity, of wondering why they didn't go the extra yard. But the point is that I noted the elephants, assumed they were connected to some sort of promotion and did exactly nothing. Yes there were notices, but I didn't take them in. I was more intrigued by the elephants themselves and people's reaction.

The moment was lost or, at least, not maximally exploited. Yes, people will be talking about the elephants, but where was the call to immediate action? Where was the invitation to do something then and there via their ubiquitous digital devices? Perhaps theres a regulatory issue here - but I fear that it's just a lack of joined-up ambition that prevented there being an obvious opportunity for text-based donation (rather than the opaque "text to help") or some sort of QR-code education.

Googling reveals that this is the work of the elephant family charity and has been successful in other capitals before now. The purpose is to raise awareness of the imminent potential extinction of the Asian elephant and the immediate aim is "to raise a projected £2 million" (I assume via donations and the auctioning of the elephants in July) "by attracting an estimated audience of 25 million".

Those quotes reek of PR speak and old thinking to me and while they've been successful before and I surely hope they will be more than successful in reaching their targets this time, I just fear they could be underachieving given the impact their brilliant idea has attracted.

Awareness is one thing, awareness of a campaign gimmick is something less. In this fast-moving attention-poor world, if you do manage the difficult task of getting their attention you need to enrich it by making it easy and compelling for people to act. Then and there.

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Coalition Checklist

For various reasons, Tyler hasn't got time right now for a full blog on yesterday's coalition manifesto launch. So we've summarised our reading in the handy cut-out-and-keep checklist above.

Overall, there are definitely reasons to be cheerful. They are going to cut borrowing, mainly though cuts in public spending. They are going to cut some taxes - although only at the price of increasing others. They are going to cut red tape, and they are going to publish detailed public spending data online.

On welfare there will be more conditionality and more use of private contractors to get people back to work. But no mention of reverting to a 50% poverty line from the current 60% - the key change to discourage idleness and vice.

In education, we're promised the full Gove, so hurrah for that.

No hurrahs for the health plans - more top-down  direction under a new wrapper.

Fiscal decentralisation? Yes, it's there, and Clegg has assured us they understand the criticality of money - ie unless you dencentralise control over the money, you've decentralised nothing. But we can see nothing on the real issue - decentralisation of tax raising power.

Law and order gets one big tick for elected sheriffs, but nothing for locking up more bad guys (ie the 100,000 villains who are responsible for half of all crime).

There will be an immigration cap on non-EU migrants, but no detail on the tricky stuff like overstaying students.

With the Reich in flames, you might think now is the time to get on with renegotiating ourselves back to a free trade arrangement. Nothing on that.

And the eco-lunacy carries on unabated.

Still, there are some words we can definitely tick.

We'll be filling in the Deeds column as and when.

PS This evening at 7.30pm Tyler will be talking to a select group of Conservative activists about the fiscal choices we now face. It's been organised by that Man in A Shed and will take place at Churchill House, Chobham Road, Woking. Not quite sure what the entry arrangements are, but if anyone wanted to come, I'm sure we could squeeze you in.

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Larf?

The chippy grammar school boys are on the right... and they still are

Well you've got to laugh, haven't you.

Today Tyler had a rather long, and shamefully liquid, lunch with an old friend from the Treasury bunker. Two old Treasury hands, and two grammar school boys from the old days.

Ah yes, the old days.

The days when public school toffs were not the only game in town. The days when the richest fifth of students were not seven times more likely to be admitted to the top unis than those from deprived backgrounds. The days when kids who were eligible for free school meals (such as Tyler) had a serious chance of making it to Oxbridge and beyond. And the days when comfortable middle class parents (such as Tyler and his friend) did not feel the need to send their own kids to public schools.

Yes, indeed, ladies and gentlemen. Our new coalition cabinet comprises 23 members, of which no fewer than 14 went to fee-paying schools. Eton, Westminster, St Pauls, Charterhouse, Rugby, Wellington - they're all there (although interestingly, not Winchester).

Does it matter?

On one level no. As long as they can do the job, that's all we need. In fact, grammar school girl Mrs T reckons that when it comes to leading a charge into the machine guns, your average toff is a far better bet than your average prole. It's not just brains you see. It's character. Breeding. Bred to lead. And Cam is right out of the top drawer.

But jeeps, what does it say about the state of our state education system?

93% of our kids get educated in state schools, yet state school pupils comprise just 39% of the cabinet.

We know the Battle of Waterloo was won on the playing fields of Eton, but this is 2010, not 1810. As things stand, Tyler and his friend feel like some historic aberration. We benefited from a short burst of sunshine when those at the bottom of the pond had a real chance to crawl out and become butterflies. But now the dark clouds of privilege have rolled back in.

We've said it before, but we'll say it again: the single most important thing our new government must do is to push through Gove's free schools reform. We need the sunshine back again.

Let's hope it wasn't all just blather.

PS Declaration of personal involvement - Tyler knows our new Home Secretary personally. We thought Theresa did a good job at the Police Federation Conference today. The police don't like the idea of elected sheriffs, but Theresa got them to listen by putting it into the context of returning authority to the police themselves, and away from Whitehall. Most people on the right wrote Theresa off long ago. She may yet surprise them. Apart from anything else, she's one of the 9 cabinet members who were state educated, so she immediately gets six bonus points in our book.

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Different Strokes.

This week I had the strange experience of being the only audience member I knew. This was at a lecture venue where, in the past, I have been concerned that I knew too many people and was therefore too close to the online echo-chamber.

Those often brilliant lectures have tended to be about neuroscience, social networks and anthropology. Marketing-related individuals know this to be the latest seam of official knowledge that must be mined for sound-bites and hence I've had no shortage of company in the bar afterwards.

The marketer-free lecture was a discussion of comedy and featured the writers and producers of some of the biggest TV shows on both sides of the Atlantic. I couldn't understand why I was alone. Sure, there was no mention of brain chemistry, but apart from being a fan, it seemed obvious to me that comedy can tell us so much about cultural landscapes, concise communication and connecting with people.

Confirmation came from Caryn Mandabach (producer of The Cosby Show, Roseanne, Third Rock From The Sun, Nurse Jackie etc) who was asked about her creative philosophy. Her response? Look around, see what's not there and then make that.

It's smart to follow an intelligent group, but discovery more often occurs when you don't follow the pack. You also get to talk to new people in the bar. Try it.

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Enron Labour

Allow me to introduce the finalists for Labour's Got A New Leader*

Today's revelations of Labour ministers flouting the rules governing the proper use of taxpayers' money ought to shock us.

"Labour ministers rammed through hundreds of millions of pounds of spending on pet projects before the election against the explicit advice of senior civil servants. Senior mandarins throughout Whitehall resorted to the ‘nuclear option’ – writing to demand written orders from ministers because they disapproved of the decisions."

According to Jonathan Baum, General Secretary of the First Division Association, which represents senior civil servants (and of which Tyler was once a member):

‘This is very much a nuclear option in government departments. ...it is very clear that the permanent secretary was very concerned about the spending decision but was overruled by the minister. When a permanent secretary asks for the letter of direction from a minister it is because they feel a serious decision is being taken which they feel is not right.’

We don't yet have all the details of precisely which decisions were rammed through like this, but the bottom line is clear enough - Labour ministers abused their power in a desperate last-ditch attempt to buy votes... with our money. Shocking. Absolutely jaw-droppingly breath-takingly shocking.

And yet... are we really shocked? Can we any longer be shocked by what that appalling bunch did during those 13 abysmal years?

From the very start they lied and cheated their way through office. They systematically abused our trust with their Enronised debt figures, their bubble economy, their illegal war, their fiddled dumbed-down exam results, their fudged crime statistics, their gross distortions over immigration, and their unbridled pillaging of the public purse.

As the indispensable Jeff put it last week (and please do read it if you haven't already):

"Unemployment is higher today than in 1997, as are taxes. The pound is worth less than 13 years ago, as are many private pension schemes. Personal insolvencies are at record levels. Worst of all, the state is borrowing one pound in every four that it spends, and our collective debt is set to double by 2014-15 to about £1.4 trillion, equal to one year's GDP.

The "success" of New Labour's economic expansion was a sham, based on a simple formula: spend more than we earn; pass off consumption as investment; wallow in self congratulation. Through the "boom" times of 2003-2007, all of Mr Brown's budgets involved massive borrowing. He told us we were getting richer, while in effect making us poorer.

In those five years alone, he clocked up £160 billion of debt. These are harsh, unavoidable facts. The legacy of that profligacy will bear down on British taxpayers for generations. As Niall Ferguson, professor of history at Harvard, has concluded, Mr Brown's stewardship of the economy was a "disaster".

But look, we are where we are. It's too late to wish away 1997. The main thing now is this: when the Brothers Millipede next appear arm in arm on the stage, glottal stopping in the limelight, and singing their saccharin ditties of progressive consensus and fairness for all, just remember.

Remember that Labour always always wreck our economy. Remember they always wreck our public finances, and they always leave a gigantic mess that someone else has to clear up and we have to pay for.

There are no exceptions. From Ronald McDonald, to Jerusalem Clement, to Wislon, to Uncle Jim, to Bliar, to Brown, it is always a disaster.

So please - one last time - never ever give them another chance.

PS Today's inflation numbers are once again very unsettling:

All measures of inflation are up, and RPI inflation is now running at 5.3%, the highest for nearly two decades. The Bank of England may still be relaxed about this, but we most certainly are not. Anyone on a fixed income - which these days includes pretty well everyone working in the private sector outside the banks - is being squeezed dry. And as for savers on their 0.5% interest rates, they've been so squeezed they're now little more than a dessicated husk.

And sterling? Well it paused for breath today, but it still looks very groggy. As we blogged yesterday, getting a grip on our public spending problem will be good for sterling in the longer term. But in the short-term it may actually make sterling a bit soggy since lower spending allows the Bank to keep interest rates lower for longer. Of course, if the Bank were suddenly to realise the jolly old inflation genie was out of its bottle again, then rates would go up and sterling would firm.

So what happened to the point that sterling would collapse if we didn't cut spending? Well, it's still there. If George doesn't cut spending, HMG will have to borrow more, a chunk of it from abroad. Which is fine as long as investors remain confident that they'll get repaid, and as long as we give them a good rate of interest. But if for some reason, confidence cracked - like for example, the markets suddenly got the crazy idea the coalition couldn't actually agree on spending cuts - then there'd be a rush for the exit. The point is that currencies are driven by a whole raft of different pressures, and they are just about the least predictable of all the key asset prices: someone once described them to Tyler as "the balancing residual in the global financial system". But what we do know from our own experience is that confidence is key. Which is why these cuts are vital to the value of sterling.

*Footnote Talking of Enron, did you see that the award winning (here) British play of that name (pic above) has just bombed on Broadway. It closed after two weeks losing an estimated $4m. The British theatre establishment are aghast, blaming those low-brow insular Yanks for not appreciating good art. Another explanation goes along the lines of US audiences not being prepared to stump up $120 a seat to watch a bunch of anti-capitalist anti-American propaganda cooked up by a state-funded theatre company from an irrelevant socialist country thousands of miles away. And come to that, who said it was OK for my taxes to be used to put on the play in the first place? If people want to watch anti-capitalist anti-American propaganda, fine. But they should pay for it themselves.

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There's No Money Left

The cupboard is bare... except for these guys

Following yesterday's post, Mrs T and others have once again warned Tyler to quit moaning and give Dave's new team a chance.

So we will. From now until the Budget on 22 June, we'll be following a new operating rule - we'll only look for the positives.

And in that spirit, let's immediately record that today's Osborne, Laws, and Budd Show was most encouraging.

For one thing, George suddenly sounded a lot more comfortable and credible. Yes, he did have an opportunist political bash or three at Labour for the mess they've left behind. But in the circs, that's surely fair comment. More importantly, for the first time he actually sounded like a senior pilot capable of flying us through an ash cloud back to safety.

We especially liked the fact that he'd brought along Sir Alan Budd in person to underline the importance of the latter's new job as head of the Office for Budget Responsibility (OBR). And to repeat his pre-election assurance that all future budgets will be based on projections produced by the OBR. And that the OBR will publish independent assessments of whether the Chancellor's policies will actually deliver what he claims.

(Yes, yes, of course - there are lots of unanswered questions about how this will work in practice, and you might wonder quite how independent Budd's seconded Treasury officials will turn out to be, but we're not going there - we're accentuating the positive, remember?).

Laws came over very well as Chief Secretary. He sounded focused, tough, and entirely unphased by the letter left on the desk by his predecessor helpfully informing him there's no money left.

And we like the urgency: the Budget brought forward to 22 June, and announcements on this year's £6bn savings early next week.

What else? What else do we like?

Well, reopening all those scorched earth decisions made by Labour in the run-up to the election, that has to be sensible. If we can get out of them, we should.

And what about those skeletons reportedly clattering out of cupboards all over Whitehall? What can we say positively about them? The biggest and scariest of them is the simple fact that Darling's fiscal forecasts were fiddled, meaning that the overall position is even worse than he admitted. But in truth, that shouldn't have come as a shock to anyone (eg see this BOM post).

But no, genuinely, we did think the new Treasury team came across convincingly today. There may be no money left, but for the first time in many years we seem to be facing up to some reality.

PS As you will doubtless have spotted, despite our brilliant new Chancellor, sterling has been going for a bit of a walk lately:

The market seems to be betting that George will succeed in cutting spending. You may think that ought to be good for sterling - after all, haven't we been told we must cut in order to head off a sterling collapse? But the market is figuring that if George delivers real cuts, then the Bank of England will be able to hold down interest rates for longer. Which means sterling gets less support from short-term money flows, and therefore sags. Funny chaps markets... although longer-term, sound public finances will certainly mean stronger sterling.

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The Coming Middle Class Rebellion

More tea vicar?

Honeymoon glow aside, Britain's middle class is about to get seriously whacked (see previous blogs eg here). Someone's got to pay to clear up Labour's gigantic mess, and there simply aren't enough rich people to go round.

Middle class? We mean those legendary Decent Hard Working Families (herinafter DHWFs) on incomes between £30k and £60k pa. Only 10% of the population get more than them, so they're fairly comfortable - although not comfortable enough to buy themselves out of state education and the NHS. They comprise 50% of the population, and pay getting on for two-thirds of all the taxes falling on UK households.

And boy, are they in for a nasty surprise. for one thing, their taxes are set to go through the roof, and their state benefits binned.

According to accountants Grant Thornton, just adding up the likely tax increases and tougher limits on Child Tax Credits we already know about will make a family on £50k pa £1250 worse off:

In terms of net disposable income, that's a cut of around 3%. But for many working families the pain will be compounded by the forthcoming increase in mortgage rates. Worse, these are just the tax increases and benefit cuts we already know about. They will yield nowhere near enough to fill Labour's huge fiscal crater, generally put at somewhere between 6% and 10% of GDP (£90-150bn pa).

Let's just remind ourselves of the basic options for filling that crater:

1. Increase taxes on business - outside the counsels of Greenpeace and Will Hutton, this is universally viewed as A Bad Thing: our business taxes are already high compared to competitors, and at this point we really cannot afford to undermine our future prosperity any further - indeed George needs to cut biz taxes
2. Increase taxes on the undeserving rich - sure... except that there aren't nearly enough of them to go round - the combined income of the top 10% is c£230bn pa (2007-08), of which over £80bn is already taken away in tax, leaving just £150bn to squeeze. Moreover, squeeze them too hard and they could upsticks and leave, taking their drive and entrepreneurial skills with them;
3. Increase taxes on DHWFs - our middle-class 50% get a combined income of  c£450bn pa, of which about £100bn is already taxed away, leaving £350 bn to squeeze further. That's more than twice as much as the undeserving rich have.
4. Cut welfare benefits - with the total benefits bill now nearly £200bn pa, this is a clear target for cuts and freezes. But since nobody wants to clobber the genuinely deserving poor, and since the undeserving rich hardly get anything anyway, much of the pain will have to be land on - yes, you guessed it - the DHWFs. At present they get around 40% of the total benefits spend, and they should expect to see a big squeeze.
5. Cut spending on public services - total departmental spending excluding benefits is running at around £400bn pa, and that's going to see cuts of 10% or more. By rights, the cuts ought to be accompanied by massive public sector reform to squeeze out better value, but don't hold your breath. And who will suffer? Well, everyone to some extent, but remember that unlike the undeserving rich, the DHWFs can't afford to buy themselves out of underperforming state schools and the NHS.

If you spend a couple of minutes mulling over those options, it's pretty clear who's going to be making the biggest sacrifices over the next few years. It's none other than those Decent Hard Working Families our politicos spend so much time pontificating about and wooing.

And they ought to get very angry about it. Very angry indeed. After all, the essential reason we face this crisis is that our politicos have spent far too much of our money.

So how will the HWDFs react?

It's quite possible they'll just accept it. Under a barrage of soothing BBC/Grun/SDP propaganda it's quite possible they'll meekly accept their belt-tightening and just make the best of it.

But just possibly, they won't. Just possibly, they'll look at their rising tax bills, lost benefits, and collapsing services, and say enough is enough. It's time for some serious change.

And that's what Tyler hopes.

Tyler hopes we will finally see a middle class rebellion - the kind of rebellion that forces our metropolitan ruling elite to change tack. A British version of the Tea Party movement that has swept the US, where DHWFs from outside the elite come together to demand lower taxes and a smaller state. Where individual MPs who won't listen find themselves defrocked by constituency-based uprisings. And where before too long, the whole of Westminster gets the message.

Couldn't happen here?

Don't be so sure. It actually did happen once before in not very different circumstances.

Back in 1921 we also had a Lib-Con coalition, which was also wrestling with public spending that was way too high. But they failed to grip it, and the National Debt (aka the future burden on taxpayers) was soaring through the roof.

At which point, a group of disgruntled Tory activists backed by press baron Lord Rothermere (with Northcliffe soon jumping on the band wagon), set up the Anti-Waste League. It put up candidates in parliamentary by-elections and actually won - three by-elections in the first half of 1921.

Prime Minister Lloyd George and his inner circle panicked. While he'd squared off the Tory front bench with generous dollops of patronage and preferment, rattled Tory backbenchers were now threatening to bring him down (their actual rebellion came just a year later in 1922). He was forced to implement huge spending cuts (the Geddes Axe - see this blog and also here).

So we'll see. Right here today, our Lib-Con coalition basks in warm Spring sunshine with 64% approval. But once the Autumn leaves start falling and cold reality starts to bite, we'll find out what the DHWFs really think.

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Learning By Doing.

Successful marketing, they say, is dependent on understanding your customers. Implicit in that is the need to understand how people assimilate information, about how they come to decisions, and about how they learn.

One part of that is to submerge yourself in learning theory and the psychology of persuasion and behavioural change. Another, I've discovered by chance recently, is to learn something new. Something that has nothing to do with your work and which preferably you can learn with a group of strangers and a number of teachers.

It's a humbling experience and that's reason enough to do it. But you'll also come to appreciate the peaks and troughs of learning; the variety of teaching methods, personalities and vocabularies; the ones that work for you and maybe why they do and others don't; and you'll witness all of the above as it relates to a random group of people.

I won't labour the metaphor, but as well as learning what you went there to learn, you'll also learn a lot about communication and the absorption of information, not to mention your own intellectual prejudices. And, best of all, you'll be doing it in real life rather than in a focus group.

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It Was One Of Wilde's

Don't blame us - it was St Vince's idea

The Times headline says it all:

"Get ready for VAT rise to pay for £17bn Lib Dem tax cuts, economists warn"

So in the noble spirit of compromise and The National Interest, George will set aside narrow party politics and grant the LibDems their much-trailed £10 grand personal tax allowance. However, sadly, our present grim fiscal circumstances dictate the LD policy can only be afforded by simultaneously and reluctantly increasing VAT to 20%, or maybe more.

Now, as it happens, there are very many Tories - including Tyler - who think there is much merit in such a tax switch. Of course, we don't want to increase VAT or any other tax - we want to see the whole lot lower. But in the circs, this is a least bad option. And it's not a million miles from what Thatcher/Howe did in 1979 (albeit they cut rates rather than increasing allowances).

You will be familiar with the key argument: that cutting the tax on work will incentivise people to get off their butts, while increasing the tax on consumption will incentivise people to save. Sound Victorian values all round, nudging us once again to become the nation of hard-working, prudent folk that God intended us to be*.

What's more, our 17.5% standard VAT rate is quite low by European standards. Germany is on 19%, France on 19.6%, and Italy on 20%, with further increases looking quite likely. Lucky old Sweden, Denmark, and Hungary are already on 25%.

Of course, increasing the personal tax allowance all the way to £10 grand would be expensive. St Vince costed it at £17bn, and to fund that we'd need to whack up the standard rate of VAT to around 21%. But that would still leave us comfortably in the European pack.

And there is another option, which is that instead of increasing the standard rate, George could extend the standard VAT rate to cover more items, such a food and children's clothing, both currently on a VAT rate of 0%.

That was the approach proposed by the Reform think tank in March. They pointed out that "the UK is one of only four EU countries to apply a zero rate to food and one of only three to apply a zero or reduced rate to children’s clothes". Overall, the items on zero or reduced VAT rates are extimated by the Treasury to cost over £30bn pa in lost revenue. Here's Reform's useful summary:

So simply by extending the standard rate of VAT to all items, HMT could raise another £30bn (well, maybe not quite that much because of behavioural changes - but still A Lot).

Now there is a well-known objection to VAT, which is that it's a regressive tax. In other words, because the poor consume a greater proportion of their incomes than the rich, they end up paying proportionately more tax. When the TPA looked at this just before the election, they found the poorest 20% shell out around 11% of their gross incomes on VAT, whereas it only costs the richest 20% just over 4%.

That's something we should all take very seriously, and extending the standard 17.5% rate to all the items shown in Reform's chart would make the problem much worse.

Which is why Reform coupled its proposal with a recommendation to cushion the poorest with a compensating increase in cash benefits. According to their calculations that could be done for around half the extra revenue flowing from the increase in VAT.

So in summary, making everything subject to 17.5% VAT, and cushioning the poor, would still leave enough to pretty well fund the £17bn pa estimated cost of the LD's £10 grand personal tax allowance.

And the very best bit?

George can say the whole shooting match was one of Wilde's.

*Footnote - for economics fetishists only Although Tyler's gut tells him that switching the tax burden from income taxes to consumption taxes would be A Good Thing Ltd, it has to be said that the econometric evidence is mixed. Indeed, even the theory is mixed - after all, we work to earn to consume, so it shouldn't make too much difference whether we pay our taxes in our wage packets or at the shop counter. Yes, I know we also save, but theoretically we save so we can consume later in life after we retire (indeed one Nobel winning economist built his early career on the proposition that the fully rational, fully informed man spends his last and final penny on having the last and final screw driven into his coffin lid).

M'learned friend Andrew Lilico at Policy Exchange is big on this, and in a recent paper we've already blogged, he used an economic model to compare the economic impact of changes in the basic income tax rate with changes in the standard VAT rate. He concluded:

"...recent academic evidence and experiments on the model suggest that increasing VAT may be as bad as, or worse, than increasing the basic rate of income. Some firms will try to absorb some of the effects of a VAT rise – e.g. because they do not operate in competitive markets, or because they are in financial difficulties and need to maintain turnover. Consequently, not all prices will necessarily rise by the same amount, distorting relative prices, re-directing economic activity inefficiently and so reducing growth. Not all goods attract the same level of VAT – e.g. some are subject to reduced or zero rates increasing the distorting effect."

So - shamelessly putting words into his mouth - Andrew might agree with Reform's proposal to extend the standard VAT rate in order to remove distortions, but would seriously doubt that an overall switch from income tax to VAT would have much long-term beneficial effect on the stuff we really care about - GDP growth, employment, etc.

He goes on to make another interesting point:

"In the 1970s, rates of income tax were high, income tax complexities excessive, and union power higher (increasing the distorting effects of income tax) whilst rates of VAT were low (so that the effects of distortions were small). Until the index-linking of benefits during the 1980s,VAT increases also effectively reduced the value of benefits, increasing work incentives. At this point the trade-off may well have been more favourable to increasing VAT and reducing income tax. Now the rate of VAT is approaching the basic rate of income tax it may be the case that VAT rises will dominate over income tax related distortions."

On one level that would suggest George shouldn't do a Thatcher/Howe because the 70s were another country. But on the other hand, increasing VAT would be a way of whittling down the real value of welfare benefits in a world of low inflation - ie freeze benefits as part of the cuts package and let the simultaneous VAT hike do its work.

That's how you start thinking when you shack up with the Lib Dems.

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