Save now to stop the roof falling in on retirement

POLITICIANS do not seem able to tell the difference between tax revenue and tax rates. Under New Labour, revenue has risen strongly. The Tories have claimed this is due to the stealth taxes of Gordon Brown. This may be good politics, but it is bad economics.

The key reason for buoyant revenue has been the fall in savings. Savings of £100 produce no revenue, but £100 spent will probably bring in more than £50 in National Insurance, income tax and VAT.

The fact British consumers have been indulging in a huge spending binge has thus pushed up revenue, without a change in tax rates. The binge has had its good side - it has kept the UK economy growing while other countries have had recessions. But it has also been unfortunate. It has created a myth about the prudence of Chancellor Brown that has fooled Tories as well as New Labour. It has given the dangerous illusion that budget surpluses have been due to caution and canny management.

In reality, they represent a time-bomb. Voters want more spent on health, education and transport. The illusion has made it seem affordable. When the consumption boom ends, tax revenue will disappoint, but public spending will have grown massively.

According to the Organisation for Economic Co-operation and Development, France and Germany have national savings rates about 6% of gross domestic product higher than ours. When UK savings rise towards those levels, revenue will fall and there will be a budget problem.

But, equally, we will have a problem if savings do not rise. Britain not only needs to invest a lot more in services, it needs to invest a lot more in houses. Property prices are rising for lots of reasons. Low interest rates have boosted demand, as has the shift from north to south. But lack of supply has been crucial and largely ignored.

Planning restrictions have had a baneful impact on house prices and thus on the economy as a whole. As the wisdom of owning houses is underlined by the increase in prices, they are bought to rent and not live in. The lack of supply simply reinforces demand and pushes up prices again.

The belief that prices will always rise faster than other forms of inflation has a depressing effect on savings. House-owners think saving is unnecessary. They expect the rise in house values to provide them with security in retirement.

But without savings, we are buying ourselves a sad old age. The rise in house prices represents a tax on the young for the benefit of the old. After a time, the tax will become unbearable and we will have another collapse in prices.

When it happens, savings will shoot up and tax rates will have to rise at the same time. The Government that has to face this combination of falling prices and rising tax rates will be very unpopular indeed.

www.smithers.co.uk