Shrinking Shears

We thought we'd moved on from these

So let's see if we've got this right.

The defence budget - intitially slated for a 25% cut - is now apparently only going to lose 7-8%.

The schools budget - intitially slated to share in education's 25% cut - is now to be preserved at current spending levels in real terms.

The quango bonfire turned out to be a damp barbecue.

There's £7bn extra cash to fund early years help for poor kids. And in all likelihood further "good news" spending commitments to come out between now and Wednesday.

Plus of course, the huge NHS budget is ringfenced to keep all Labour's planned growth, as is the overseas aid budget.

All told, that's starting to sound like an awful lot of backsliding in the cuts department. Are these cuts actually going to come anywhere near what we need?

Let's remind ourselves of the big picture.

Back in his June Budget, George announced that total public spending (TME) would be brought down from this year's 47.3% of GDP to 39.8% by 2015-16. That's a cut of 7.5 percentage points of GDP, which is massive. It's a substantially bigger reduction than the 4 percentage points Thatcher/Howe achieved in the five years after the early 80's recession. And in fact the only time anything like that has ever been achieved in peacetime was during the Lawson boom in the late 80s - a repeat of which does not look altogether likely over the next 5 years.

But here's the really striking thing, despite the sharp projected fall in spending as a percentage of GDP, George's budget didn't incorporate any actual overall spending cut at all. In fact, total spending in 2015-16 was projected to be 9% higher than this year.

In reality, all George was doing was to hold the growth of spending below the projected growth of GDP. Indeed, Tyler's fag packet says that had he frozen spending, then by 2015-16 projected growth in GDP would have reduced the spending percentage to a mere 36.6% of GDP, rather than the 39.8% he's actually planning.

OK it's true, a freeze in cash spending would almost certainly entail a cut in real spending, given the projected rise in prices. But as Tim Morgan shows in a useful new paper for the Centre for Policy Studies, even taking account of projected inflation, George's overall spending plans (the so-called "spending envelope") will still only deliver a minimal real-terms cut. In fact, Morgan calculates that even after five years of supposedly hard pounding, spending in real terms will still only have retreated back to last year's level:

Let's just pause to reflect on this.

What we're saying is that public spending - even in real inflation-adjusted terms - is not planned to fall by very much at all. In terms of reducing its share of national income, most of the heavy lifting is done by the projected growth in that income. Growth that is put at an average 2.7% pa over the next five years.

Hmmm.

Sound familiar?

It's almost like that Shadow Chancellor who used to go on about sharing the proceeds of growth. The one who kept on about it right up until the moment the economy fell over that cliff.

What we really need to understand is that if we don't get 2.7% pa growth over the next 5 years, things could get rather awkward. Not only would the current plan not deliver anything like the 7.5 percentage point drop in spending's GDP share, the lower growth would itself push spending higher via its effect on welfare payments.

Conclusion?

Despite all the screams and waving of bloody stumps we'll be subjected to this week, these cuts overall are pretty modest (and see this by George Trefgarne). The real trouble is that for transparently obvious political reasons, George and Cam have ringfenced a number of chunky areas like the NHS, thus making the pain in other areas that much greater.

From what we hear, a lot of that pain will now fall on welfare payments. Which is fine, inasmuch as it accounts for more than a quarter of all public spending, it has grown hugely under Labour, and working age benefits have to be cut to incentivise work.

But what worries us is that the detail of these welfare cuts does not seem to have been thought through. As we saw with the Child Benefit announcement, it's one thing to agree a change during a late-night sofa session with Dave and George, but it's quite another to force through implementation when the practical details haven't been sorted. There is a very real risk of backsliding.

Everybody knows cutting is difficult. Everybody knew it was going to be difficult this time.

But given that the overall cuts total is considerably less ambitious than the BBC and the rest of the left would have you believe, let's just hope that George has got some hard detail to announce on Wednesday.

PS The late volte face on defence spending sounds like another worrying example of sofa government. Mr Cam apparently intervened personally to over-rule the Treasury and soften the impending cuts. Not only was Cam nobbled by the Defence Chiefs - who naturally want no defence cuts - but it seems very likely he got a personal ear-bashing from Hillary. No doubt she would have told him that while she herself is a great Anglophile and defender of the Special Relationship, she's surrounded by people who have never forgiven  the War of 1812, and who are sick of propping us up militarily. Unless Cam rescinded part of the cuts, he could kiss goodbye to joint press conferences with St O on the red carpet, plus those shiny new nukes we've ordered. But let's recall that after the US, we are NATO's second highest defence spender (well, OK, Greece is higher, but we hardly want to go there). According to the official NATO stats, we currently spend 2.7% of GDP on defence (2009), double Germany's 1.4%. Even France - La Gloire herself - only spends 2.1%. So WTF? Why should we continue to shoulder a higher burden, when others are allowed to get away with much less? Tyler yields to nobody in his admiration for the dedication and courage of our services, but there's something seriously out of whack here. Over the entire 65 years since WW2, British taxpayers have shouldered a wholly disproportionate burden in defence of the West. As Ted Bromund's very helpful long-term chart shows (see this blog), for most of the post-War period we spent between 5% and 10% on defence - money the Germans, say, were able to invest in wealth producing infrastrucure and capital equipment:

Sofa spending decisions are no substitute for a fundamental reappraisal of why exactly we're doing all this.

Lessons From A Damp Barbecue

Are we having fun yet?

Less a bonfire, more a damp barbecue. There is widespread disappointment that yesterday's cull of the quangos wasn't nearly as decisive as originally billed.

In summary, out of 901 quangos reviewed, 380 will remain entirely unchanged, with a further 40 still undecided (ie too difficult to close). On top of that, another 171 will be retained but "substantially reformed", and a further 57 new ones formed from mergers. Overall, out of the original 901, we will still be left with 648. And even among those that are going, many of the functions and staff will simply transfer back to their sponsoring departments.

So was the whole exercise a waste of time?

No, that would be too gloomy. Some of BOM's all-time favourites are definitely going - eg the Audit Commission, the Regional Development Agencies, and the Qualifications and Curriculum Authority. Some praise is certainly due.

But many other old favourites survive. The notoriously profligate British Council survives, as does, ahem, "public service broadcaster" C4.

And those mergers are a worry. We recall what happened to the much mocked Potato Marketing Council (the quango responsible for National Chip Week - see this blog). By 2008 it had become such an embarrassment that Labour merged it into the £50m pa Agriculture and Horticulture Development Board (AHDB). And as far as anyone can see, it's still there, taxing the potato industry £6m pa to fund its half-baked campaigns for more oven chips.

The fundamental point is this: rearranging bureaucratic deckchairs will never save much money. Simply switching the name plates on the front doors will not do it.

What Cam's government has to do is to axe functions. That's the way to save real money.

Take the British Council. It spends an eye-popping half billion per annum on all manner of bizarre cultural enterprises in the far flung corners of the world (of which £250m comes direct from general taxation), and yet nobody has ever been able to show we get value from it. Let's close it altogether and see what happens.

More broadly, as we've blogged before, there are basically only two ways of cutting public spending.

The first is known as "starving the beast". That involves the beastmaster (aka the Chancellor) cutting a fat beast's food budget and hoping that the thing will get itself in shape. That it will make economies by cutting down on cream cakes and other luxuries, and spending its smaller budget on stuff that's really needed. Like broccoli and oily fish.

Beast starving undoubtedly has a role in budget control, especially when prolonged control is required - as now. But the problem with fat beasts is that they may not like broccoli and oily fish. They may go on buying the same old cream cakes and oven chips and end up slumped on the sofa in front of daytime TV and no use to anyone...

Hmm... another metaphor that's spun away from us. The key point is that simply cutting budgets from the top without specifying what functions are being cut risks a serious degradation of frontline services across the board. In a public sector without customer choice and the pressure of competition, leaving the decisions entirely to frontline managers is likely to result in worse services to us, the helpless victims.

Which is why when George announces his long-awaited spending review next week, we must hope we get some chapter and verse. We need to know not just the departmental spending allocations, but also the functions that are being scrapped or privatised.

University Finance Sorted

Time to break out the port?

As long-time readers may recall, Tyler was never Mr Cam's biggest fan*. But this government is showing a degree of can-do radicalism that is starting to make even Mrs T's initial steps look timid (let alone the spineless foot-dragging of vacuous fantasy reformer Bliar).

In five whirlwind months they've gripped the fiscal crisis, pushed through their promised free schools reform, launched an untrailed but fundamental market-orientated restructuring of the NHS, faced down the Luddites in the police force, announced a revolution in welfare, and signed death warrants on hundreds of useless and unaccountable quangos. There's more, but space is limited.

Yesterday they announced the much needed reform of university finance. Lord Browne's excellent report cuts straight through the BS. His recommendations manage to combine proper funding for the unis, with affordability, with competitive pressure, with... well, to coin a phrase... fairness for all (especially taxpayers). So hurrah.

We've blogged the shambolic state of higher education many times (see all previous blogs gathered here). In summary:

• Taxpayers now spend £12bn pa on higher education, up around 50% in real terms since 1997; the students themselves spend a whole lot more.
• There are 2.3m students, or 4% of the entire population (including 27,000 doing the Major's favourite, the degree in media studies).
• The 50% participation target is "aspirational" - ie entirely arbitrary (admitted to the PAC by the Chief Executive of the Higher Education Funding Council for England - see this blog).
• The average HE participation rate across the OECD is 35%: ours is already 40% and heading for 50%
• Courses have been dumbed down and grading standards slashed - the proportion gaining first class degrees has nearly doubled under Labour ( see this blog)
• Thousands of graduates now do non-graduate jobs, and that number is growing rapidly- their M Mouse degrees have simply not equipped them to do anything else (according to HESA, 75% - yes, 75% - of 2002-3 graduates were still in non-traditional graduate jobs four years after graduation; what's more, 26% weren't in full-time jobs of any kind; and see this blog)
• The average financial return to a degree is plummeting - according to PWC, the gross return to an Arts degree is now only about £30 grand, and that takes no account of the costs of study and the earnings foregone - net net an average Arts degree almost certainly reduces lifetime wealth.

Now, it's on that last point - the financial return to a degree - that Labour misled us most egregiously. Back in 2008 we attended a meeting of the Public Accounts Committee (under its previous esteemed chairman), where Bliar's claim that a degree was worth an average £400 grand was brutally exposed for the fabrication it was. And the Browne Report gives us some chapter and verse on just how the number was cooked up (see Report footnote 11).

Apparently the £400 grand referred not to the value of a degree per se, but to the value of a degree plus all other education beyond the average, which would certainly include A Levels. That is a gross deception, especially when you remember that all reputable research in this area has always and correctly calculated the value of a degree as being the difference between what you earn with A Levels alone and what you earn with a degree (and Tyler does actually know about this, having researched the area for the old Department of Education back in the 70s).

Browne wisely takes his estimate of a degree's value not from HMG or the unis but from the OECD. And they reckon that the lifetime value to a male graduate in the UK is currently running at just over $200,000, or about £120 grand (note that the OECD's calcs are published in purchasing power parity dolllars). Here's Browne's summary chart (click on image to enlarge):

So there is a financial return overall, which is not to be sniffed at (although note that the return for female grads is estimated by the OECD to be 25% lower).

However, there are some very important points to note here:

1. These estimates are based on the lifetime earnings of previous graduates, the ones who got their degrees long before the explosion in graduate numbers and M Mouse degrees. The returns looking forward are almost certainly going to be lower.
2. Brown quotes only the returns to the grads themselves. As taxpayers, what we need to know about are the returns to us. What do we get out of the muti-billion subsidy we currently provide?

And even though the report doesn't spell it out, that second point lies at the heart of the Browne reforms. In future, our unis will be funded much more by the fees they can earn from their students, and those fees will be financed not by taxpayers but by the students themseleves, via higher student loans. Which is exactly as it should be.

Because not only are the students the principal beneficiaries of their degrees, but by forcing students to think seriously about the value of a degree, we will force the suppliers to deliver that value far more effectively than any number of quango funding councils (in case you don't know, this is called the market).

Poor students being put off?

Well, at the margin you might worry about that. But as Browne was pointing out all yesterday, a university education will still be free at the point of use. And there will be no credit check on first time students applying for a loan. What's more, graduates who earn less than £21 grand pa (indexed against average earnings), will not have to pay anything.

Education is about more than cold hard cash?

Well, yes, it is. And Tyler is a big fan of the so-called "non-pecuniary benefits".

But by the time we get to degree level (ie assuming we've already taught everyone the 3Rs and a bit of shared science and culture), most of those wider benefits again accrue to the individual.

So we think the Browne reforms are spot on. Congratulations to him and his team.

And to St Vince for having the balls to accept reality.

PS Yes, yes, hypocrisy. Tyler got not one, but two free degrees, from not one but two top Russell unis. How can he now kick the ladder away? Well, (a) a much smaller percentage of pupils went to unis in those days so the taxpayer bill was much less, (b) Tyler has since paid sick-making amounts of tax that would probably have funded several entire lifetimes at uni, (c) Tyler does make voluntary contributions to both his two unis. Apart from that, you do have a point. In truth, the taxpayer should never have funded uni education, other than through loan provision.

*Footnote While Tyler was never Mr Cam's greatest fan, Mrs T (T as in Tyler, that is) always was. She backed him from the very first time she heard him speak back in 2005. And she now greets each new brilliant radical announcement with a triumphant "that's my boy". Very irritating.

Simple Shopper To Go Green?

I could do you 200 dozen, trade

Regular BOM readers will be all too familiar with the Simple Shopper and his staggering ability to burn our cash (see previous blogs gathered here). But Cam's procurement guru Sir Philip Green has clearly been rocked by what he's seen of the Shopper's operations:

"The process is shocking. There's no reporting, there's no accountability... You could not be in business if you operated like this. It would be impossible."

His report is refreshingly brief and punchy - very unlike the usual telephone directory reports we get from officialdom (see PS below). Among the real shockers he highlights:

• £2bn pa spent on landline telephony, where the Shopper is overpaying by an astonishing £600 - £700m every single year
• 400,000 hotel rooms booked every year in central London alone - Green estimates £50m pa could be saved by teleconferencing
• £800 laptops bought for £2000 each
• £20m lost on failure to break expensive central London lease - government property costs £25bn pa, but has not been managed on a commercial basis (especially taking opportunities to break expensive leases)
• Failure to exploit HMG's AAA credit rating - a commercial operation with such a rating would insist its suppliers extend lengthy credit facilities (aka paying invoices later).

Green declines to give a figure for the total possible savings, but with the total procurement spend getting on for £200bn pa, we're clearly talking tens of billions annually. Savings that would go a very long way to closing George's fiscal gap.

So WTF hasn't it been done already?

After all, governments overpaying on procurement has been a problem for at least four centuries (see this blog for what Charles II's Clerk to the Navy Board - a certain Mr Pepys - had to say about it). And the Great Helmsman used to bang on all the time about how much his brilliant procurement reforms had saved us.

Sir Philip suggests it's because government buying is too fragmented - scores of different departments and quangos buying their own paperclips and not capitalising on their combined buying power. What we need is centralised buying in the hands of hard-nosed professionals such as... well, such as Sir Philip.

Yes, nice idea. So logical.

Except... hang on a minute... isn't centralised buying precisely what was supposed to have happened under the G Helmsman? Didn't he set up the Office for Government Commerce under the direction of hard-nosed (and expensive) professionals, specifically to wring better prices out of suppliers by exploiting scale?

Well, yes he did.

And yes, it flopped.

You see, what Sir Philip has failed to understand is that once you set foot in Whitehall, you aren't in Kansas any more. You no longer have people around you who are driven by the cost imperative. Instead, you have people who are driven by the need to defend territory, and to keep the politicos off their back.

Just what that means in practice was neatly highlighted by one of those politicians, responding to Sir Philip's report today. Margaret Hodge is the new chairman of the Public Accounts Committee - the grand-daddy of Parliamentary watchdogs and the very body set up by William Ewart G to ensure taxpayers get good value from public spending. And her response to Phil's report was to say he doesn't know what he's talking about - government is much more complex than running Topshop. Even for the Public Accounts Committee, it's clear that cutting costs is not the over-riding priority.

The fundamental problem here is that government does not do cost efficiency - never has and almost certainly never will. And the reason is very simple - unlike Topshop, the "customers" of government have no choice. Yes, of course they can replace the non-execs every so often, but there is no other shop just along the High Street they can simply take their business to.

So government isn't under the same pressure as Topshop to deliver value for money. Not the same pressure to screw their suppliers down to the last penny. So even where you have centralised buying - as for example in defence equipment - because the pressure isn't there, you never get the cost saving the private sector takes as a matter of course.

No, the only real cure for all the billions government wastes in its procurement programmes is not to coordinate purchasing programmes, but to stop government procuring stuff at all.

In other words to break it up. To downsize government drastically, and return many of its current functions (like education and healthcare) back to the private sector.


PS Today's Fairness report from the Equality and Human Rights Commission is in sharp contrast to Green's snappy offering. It weighs in at a totally unreadable 750 pages, with further vast research appendices on top of that. As always, Tyler has only looked at the pictures, and we may blog one or two of them in due course. But for now, let's just note Commission head Trevor Philips' latest suggestion for government action - to redress the unfair distribution of "moral and social capital". No, we don't know how government could do that either. Outside of North Korea, that is.

Should We Grow More Lettuce?

Maybe not that much

As we've mentioned before, Tyler Senior spent his entire working life as an engineer. And he's been very uncomfortable with the sad decline of British engineering and manufacturing over recent decades. He worries about what it means for the future of the country - or as he puts it, who's going to grow the lettuce?

Sir Anthony Bamford of JCB fame shares those same worries, and this morning he urges us to change direction before it is too late. Highlighting the way that German engineering is currently hauling their economy out of recession, Bamford says:

"I can't help wondering what might have happened if our various Governments in recent decades had put in place a long-term industrial policy and promoted engineering as a professional career for young people. Maybe Britain would be enjoying the same recovery in economic growth that Germany is going through right now...

We need to look ahead and get our policymakers to focus on the future – urge them to make manufacturing important once again, treat engineering with the respect it deserves and use it as the driver for economic growth and wealth creation in Britain."

That really could be Tyler Senior talking.

Let's look at a few facts.

Contrary to what many believe, UK manufacturing output has actually grown over the last 30 years. Yes, it was severely whacked by the early-80s recession, but it bounced back strongly through the rest of the Thatcher government. Indeed, by 1988 output exceeded the previous peak in 1973. The early 90s recession saw another dip, but much more modest this time, and by the end of the Tory government in 1997, output was again at a new high and growing steadily.

In fact, over the entire 17 year period of Tory rule, manufacturing output grew - not by a huge amount (0.7% pa), but it did grow.

Which contrasts sharply with its more recent dismal performance under Labour. During their 13 years of catastrophic misrule, manufacturing output fell by 6%:

Of course, where manufacturing never recovered was in its workforce. The numbers employed have fallen from 6.6m in the late 70s to a mere 2.5m today - a loss of 4m jobs:

And it is quite true, as Bamford points out, that manufacturing has a far more important role in Germany than it does here. At the last count (2007), German manufacturing comprised 24% of their entire economy, whereas here it was just 13%.

But what should we do about it?

Well, we've already done one thing of course. We've slashed our interest rates to zero, printed a ton of money, and allowed our currency to depreciate by around 25%. That has hugely boosted the competitiveness of British manufacturers, and that is now feeding through into output - up 6% year-on-year.

Should we do more?

Certainly there's no harm in government encouraging kids to take engineering seriously. For example, it is appalling that we have hundreds of state secondary schools now labelling themselves as "specialist performing arts colleges" or "specialist sports colleges", whereas we only have 70 labelled "specialist engineering" colleges. Just how many jobs are there going to be in sports or performing arts? We are selling a cruel fantasy to the kids going to those places.

But we are very nervous about government getting back to the days of industrial planning. It didn't work then, and it won't work now. The horrible truth is that nobody has any real idea which industrial sectors are going to be the winners of tomorrow. And whereas the Germans can still prosper with 24% of their economy in manufacturing, they are Germans - leaders in engineering excellence for over a century. Whereas we produced the Austin Allegro.

Besides, amongst the richest economies, Germany is an outlier. Most countries have smaller manufacturing sectors, more in line with our own. The US is on 13%, France on 12%, and Canada on 16%. Even Japan has dropped down to 20%. And as China and the other BRICs develop, manufacturing sectors in the West seem certain to shrink further.

As we've blogged many times, what our government can most helpfully do to stimulate economic prosperity is to cut taxes and regulation. Not to pick winners.

PS And who grows the lettuce? Why, all those Eastern European migrants of course.

PPS A couple of weeks ago we were treated to the sight of a highly discomfited Steph reporting on the BBC News that the IMF had come out in support of George's economic programme, including the cuts. She spoke through gritted teeth, and Tyler wondered if she was in pain. It must be very difficult to manage a rabid anti-Tory mindset at times like this, and today's MoS gives us some splendid detail on Steph's medical history.

Do We Need Tax-Funded Science?

You can do great research without tax-funding

Today Britain's nationalised science research industry joined the list of special interest groups protesting against cuts to their public funding. They say"we hope that by showing that scientists are not a soft touch, that there will be a political price to pay if our message goes unheeded by the Treasury."

Soft touch? As things stand, taxpayers put £5bn pa into "curiosity-driven science", and that is reportedly facing the same 25% cut as all the other non-ringfenced areas of public spending. So the scientists are hardly being singled out as a soft touch - they are merely being asked to take their fair share of the pain.

But setting that aside, there is a more fundamental question here - why should British taxpayers be forced to pay for any "curiosity-driven science" at all? In tough fiscal times, why can't we leave it to the market, or private foundations, or simply coat-tail on scientific advances made elsewhere?

According to the science industry it's because if we do, we will suffer economically. As a nation we will slip behind in the great science race, and we'll therefore slip behind economically.

But in truth there is no convincing evidence that would happen. Indeed, there is no convincing evidence of any economic return to this kind of tax-funded research.

As we've blogged before, 30 years ago Tyler took part in a government study of the economic return to basic scientific research. Despite piles of papers, endless international meetings, and the best efforts all round, we could find no trace of provable return whatsoever. And our study was not alone.

Which is why the science industry subsequently came up with an alternative measure of return, placing emphasis not on the direct return to specific research projects but on the supposed "spillover benefits" into the wider economy. The idea is that having a load of brainy people engaged in serious scientific research will somehow spill over into the rest of the economy via... well... er... ummm... ah yes, maybe some of them might go off and set up go-go companies like this one.

According to the science lobby, this spillover return is worth a huge amount - a staggering 30% pa on top of any direct project return.

Of course, on an intuitive level, we all accept science is vital to our prosperity - without science we'd still have an economy based on subsistence agriculture. But to accept a 30% spillover return on £5bn of research funding from hard-pressed British taxpayers, Tyler needs to see some hard evidence. And that is distinctly lacking. As the lobby itself admits:

"All our work emphasises to us that our estimates of the rates of return need to be treated with extreme caution. Most aspects of the methods unavoidably involve considerable uncertainties...

These figures are obtained from a small empirical literature, much of it US-centred and... the application to the UK... is at best tentative."

And this interesting US article casts considerable doubt on the US literature itself, describing the key study as being "methodologically dubious".

The bottom line is that the tax-funded science lobby is lobbying for itself. And that's fair enough.

But please don't be fooled into thinking that cuts in the science budget will undermine the prosperity of the nation.

They won't.

As far as anyone has ever been able to determine, our economy can work perfectly well without any tax-funded curiosity science at all. Private enterprise can take care of it.

How Can We Ever Escape?

But does it go anywhere?

Tyler was asked a very good question today. He was explaining to some normal taxpayers just how big the real National Debt has now become, when one of them put her finger on something very troubling. "But surely if the debt's that big" she said, "how can we ever hope to escape?"

Tyler's immediate response was to advise emigration. But can that be right?

Let's recap a few facts.

The official gross National Debt has just broken through the £1 trillion mark, around £40,000 for every single British household.

But as regular BOM readers will know, that official figure vastly understates the government's real debts (eg see this blog). By the time you've added in unfunded public sector pensions, accrued unfunded state pension liabilities, PFI, Network Rail, etc etc, the real National Debt stands at over £5 trillion. And that's without counting the liabilities of our bailed out nationalised banks, which currently stand at around £2.5 trillion.

Now given that our entire annual GDP is only around £1.5 trillion, the government has amassed debts of 4-6 times our annual income. You try borrowing that kind of multiple from your friendly high street bank - they'd laugh at you, knowing you would never ever be able to pay it off.

And neither will the government.

Moreover, even after all the cuts that George will be announcing on 20th October, and all the accompanying screams we'll hear, he still plans for our debts to go on increasing all the way through this current parliament. By 2015-16 our official gross National Debt will have increased to from £1 trillion to £1.5 trillion, and all the hidden debts will almost certainly be higher too.

So OK, you say, we don't necessarily have to pay off the debt. Maybe we could pay the annual debt servicing costs and just sort of run with it.

Hmm.

According to George's Office for Budget Responsibility, by 2015-16 the government's debt interest payments will have surged to £67bn pa, well over double what they were last year, and a bill of over £2500 pa for every British family.

And to that you have to add the annual cost of unfunded public sector pensions - £32 bn pa by 2015-16 - payments under PFI contracts - £10bn pa by 2015-16 - and unfunded state pensions payments which weigh in at an astonishing £79bn pa by 2015-16 (BSP plus SERPS plus S2P).

Add that lot together and the government's annual servicing bill on its real debts will be running at £188bn pa by 2015-16. Which will be an annual bill of £7500 for every single family, and still rising.

So what then?

More public spending cuts?

Yes, we'll need them. But after 5 years of serious cuts, will the government (of any complexion) have the stomach for yet more?

Tax rises?

Maybe. But tax rises would dent what may still be a sluggish recovery. And tax rises to fund debt servicing costs hardly sound like a vote winner.

The miracle cure of course would be faster GDP growth, painlessly lifting tax revenue and cutting welfare related spending. Which is why the government should bust a gut to stimulate that growth, by for example, canning the 50p tax rate soonest.

But failing a growth spurt, we're left with just one option - default, the traditional escape route for failing governments throughout the ages.

Default on the government's formal debt will be quite easy. Inflation is the key, and as we know, we're already running well above the 2% pa supposedly underwritten by the Bank of England. And with all that extra money the Bank printed still sloshing around, it should remain high for a good while yet.

But default via inflation only really works on the government's official debt. The much bigger unfunded pension debts will be trickier to deal with, since most of the pension payments are formally linked to the inflation index - higher inflation simply means higher payments. Denied a stealth default, the government will have to be much braver on those debts, including a faster and greater increase in the state pension age, and a big cut in public sector pension benefits (much bigger than John Hutton was prepared to let on yesterday).

So where does that leave us?

For the government, escape requires years of spending cuts followed by years of severe restraint. At the same time it requires much bolder action to stimulate sustainable growth (ie tax cuts, especially axing the 50p rate). And unfortunately, the inflation tax looks certain to make a contribution.

For the individual... yup, emigration really does seem the only surefire escape route.

PS Didn't he do well. Longtime readers will recall our previous encounters with Red Ed's right left hand man Sadiq Kahn. Kahn has now ascended to the giddy heights of Shadow Justice Secretary, even though as Guido recounts, he carries a weight of "controversial" baggage. We first clocked him back in 2007 when as a member of the Public Accounts Committee he ate a man in a canoe.