Planned tax rises take their toll on consumer sentiment

London Briefing : One of the few times I have had a face-to-face row with an ex-Cabinet member happened a couple of years ago when we were discussing the future of the UK economy.

I pointed out that Gordon Brown at least had the facts on his side when he claimed that Britain was enjoying an unparalleled period of economic stability.

The (Tory) grandee retorted that Brown had no business taking credit for prosperity since the foundations had all been laid during the Thatcherite reforms of the 1980s.

And just as the benefits of those painful structural changes had taken many years to show through, the consequences of their being dismantled would also take some time to be seen.

The key idea here is that there is a critical size for government as a percentage of the whole economy.

If public sector activities occur on a scale above this "tipping point" the economy becomes flabby, inefficient and does not grow as fast as it should.

The effects of this are insidious rather than immediate but eventually show up in higher unemployment, bloated public sector deficits and a slide down the international wealth league tables.

The genius of Thatcher, apparently, was to shrink government to a size where its natural inclination to inefficiency and, occasionally, corruption, would be minimised and the private sector could do its job of income and wealth creation.

Little of this is new, of course. Many of the intrinsic ideas have been debated by the left and right for centuries. What is often missed is the pragmatic observation, built up over many years of experience, that whatever the theoretical debates over public sector provision, the observed ability of government to deliver goods and services of an acceptable standard and price is roughly nil.

Governments can do it for a while, but invariably end up making a total mess of things.

As it happens, this is perfectly true of the private sector as well. Businesses that are well run for a while often grow fat and lazy. The single most important discipline of the marketplace is that such businesses are killed.

They are either shut down or are eaten by a more efficient predator. At the very least, underperforming managers get the boot. Creative destruction, as Schumpeter called it.

The problem, of course, is that government-run enterprises rarely get shut down, or do so only after the agonies of prolonged life support operations. British economic history for much of the 1960s and 1970s is littered with examples of "key" industries that had to be supported.

The motor industry was, of course, one of these and an echo of that centrally planned past has been heard in recent weeks with the Rover debacle. Rover is an example of how the private sector can get things wrong as well.

The most grotesque aspect of the debacle has been the sight of Tony Blair over-riding the advice of the civil service and offering a short-term relief package for Rover workers. Cynics have suggested that it is likely to expire on May 5th, the day of the election.

Almost as grotesque is the protestation that the managers who took away millions since 2000 received a fair reward for the risks they took. Well, if the worst that could happen was a multi-million payout after five years they must have risked a lot originally. Actually, no - the initial capital put in was, apparently something in the "hundreds of thousands".

Anyone who has worked in both the public and private sectors can attest that either can be inefficient, either can be managed by idiots and there is nothing inherently "good" or "bad" about one or the other.

It's simply the length of time that duff people and loss-making enterprises survive: typically, but not always, the government allows mistakes and corruption to be covered up for longer.

Rover reminds us of a time when government interfered in everything. That reminder is useful: the UK economy is clearly weakening, with the consumer, in particular, showing signs of throwing in the towel. All those tax rises to come are bearing down on sentiment.

The greater part of the economy's employment gain in recent years has been in the public sector: those tax and spend policies so beloved of Brown. Thoughtful Conservatives are saying that the tipping point has been reached. The public sector is, once again, simply too big.

Chris Johns is an investment strategist with Collins Stewart. All opinions are personal.