According to the government, because they cut borrowing so much from the level they inherited from the Tories, they have loads of scope to borrow more now. Others point to the leaky roof, and the fact that borrowing is higher now than when Labour came to power.

Who’s right?

In theory, it should be easy to see. But in practice, government debt statisticians produce such a vast array of numbers that the truth gets overwhelmed – as the current debate shows only too well.

Let’s go back to the basic stats.

The official ONS stats released yesterday say net public debt as at end-September was £645.3bn, equivalent to 43.4% of GDP. In Q2 1997, that percentage stood at 42.9%. So under the official definition, Labour has unambiguously increased public borrowing since it came to office (see yesterday’s blog).

There are several points to highlight about this official debt figure:

• It includes £81.9bn of Northern Rock liabilities – quite right too, because we taxpayers are on the line to all the Crock’s depositors and debt holders just as surely as if the government had issued the debt directly
• It is net of the public sector’s liquid assets – getting on for £100bn including our £28bn foreign exchange reserves, and £32bn of local authority cash deposits (probably lower post the Icelandic bank fiasco)
• It includes the net consolidated debt of Public Corporations – currently about £4bn

This official definition of debt was the creation of Mssrs Brown and Balls when they set up their fiscal rules a decade ago (including the rule that said this measure of debt should never rise above 40% of GDP). But now that the fiscal house is in flames – or underwater, or in negative equity, or whatever is today’s image – Brown is pointing to alternative debt measures. He claims on them we’re doing much better, especially relative to other countries.

Here’s a chart showing two of these alternatives – the EU’s Maastricht Treaty measure, and the OECD’s measure. Both of these measures are gross debt, with liquid assets not netted off, and both are shown relative to GDP (including the OECD’s pre-meltdown forecasts for 2009):

At first glance, you might say Brown’s right. On both of these international measures, we’re still below (just) the level of indebtedness he inherited (as previous commenters on BOM have argued). So maybe things aren’t so bad.

But what Brown doesn’t mention is that neither of these two international debt measures has been updated to include Northern Rock. Doing that adds 5-6 percentage points of GDP, taking both measures uncomfortably above the level he inherited. And that’s before taking account of Bradford and Bingley, and the £37bn of bank shares he’s just bought. Then there’s the virtual nationalisation of RBS, which if counted in the public sector would add an eye-watering 120% of GDP to our national debt.

As for our position relative to other countries, it is true that some other major countries do have higher debt to GDP ratios. But as the IFS points out, that was a position Labour inherited, and under their stewardship we have actually been climbing the OECD’s indebtedness league table – from 10th to 8th place.

And of course, looming behind all of these recorded debt numbers is that huge pile of taxpayer debt that successive governments have kept entirely off balance-sheet: £1 trillion or so of unfunded public sector pensions, PFI debt, nuclear decommissioning costs, and sundry other guarantees and IOUs scattered around the ex-nationalised industries.

If today’s reports are to be believed, the government is all set to inject £50bn of taxpayers’ money into bank equity. It’s being trailed as taking a leaf out of Warren Buffett’s book, the legendary superstar of investment who "saved" Goldman Sachs by putting $5bn into their equity last month.

As we’ve said before, nobody would start from here. But given we are here, we have to recognise that there are no Buffetts queuing up to buy Barclays or RBS stock. If government money is the only realistic option for shoring up our banks’ balance sheets quickly, and if we taxpayers are to play Warren Buffett, we should insist on the full Warren Buffett Way.

So let’s note how that worked with Goldman.

Buffett invested $5bn in Goldman "perpetual preferred stock paying a 10 percent dividend. The securities can be repurchased by Goldman at any time in return for a 10 percent premium".

What does that mean in English?

It means Buffett’s got an investment that will pay him 10% pa indefinitely. He ranks behind Goldman’s debtholders, but ahead of its ordinary shareholders. So to the extent that Goldman goes on making a profit, Buffet gets his 10% dividend before any of the ordinary shareholders get a bean. And in the unfortunate event that Goldman goes into liquidation, Buffet gets paid out before any of the ordinary shareholders.

Against that, Buffett cannot demand repayment – he’s lent the money indefinitely. And once Goldman get through their current difficulties, they can buy him out for a fixed $5.5bn.

But Buffett also demanded and got something which could turn out to be far more valuable – "warrants to buy $5 billion of common stock for $115 a share at any time in the next five years".

Goldman stock was trading around $125 at the time, and it’s been estimated the warrants alone were worth $1.8bn.

Of course, as we’re reminded every night by the BBC and C4 News, stocks can go down as well as up. So if Goldman’s stock price slumps for the whole five years, Buffett’s warrants may turn out to be worthless. But if Goldman’s stockprice could even claw its way back to its level in early September, he’d make getting on for 50% profit on the whole deal.

And that’s the Warren Buffett Way: the way we taxpayers should expect our government to act as it negotiates with the banks this week. If bank shareholders want an equity injection from us, it has to be on our terms.

We will be watching proceedings very closely.

Unfortunately, that will do little for taxpayers, because it says nothing about cutting taxes: indeed, the primacy given to debt management means taxes could easily increase (eg see this blog). And as we’ve blogged many times, without clearly enunciated rules, politicians always find it easier to increase spending rather than cutting it.

Of course, we can all see why Mr Osborne doesn’t want to tie himself to upfront rules. As he said in his speech, Labour has done it again bigtime, leaving a toxic legacy of maxxed credit cards, rampant borrowing, and an economy on its knees. It’s a mess and nobody would start from here.

But somehow, we have to find our way out. And without early tax cuts, the way is going to be a lot longer and a lot stonier.

Mssrs Cameron and Osborne often talk about tax cuts as if they’re handing out lollies. "I’d like to give you some of your money back," says Mr Cameron, "I really would. But I’m a fiscal conservative, and mending that leaking fiscal roof must come first."

In that world, tax cutters get painted as reckless swivel-eyes who don’t care about the rain pouring through the roof – just as mad in their own way as spendaholic Brown.

But tax cuts aren’t just about handing out lollies. They aren’t even just about the moral case for letting "hard working families" keep the money they’ve sweated for. They are about improving incentives, getting the economy back up off its sick bed, and earning our way back to fiscal health.

Let’s remind ourselves of Two Key Points.

First, there is now a stack of evidence that says lower taxes mean higher growth.

The TaxPayers’ Alliance has a handy summary of the research here (Appendix). Overall, it says that a sustained one percentage point reduction in government’s share of national income can be expected to lift trend GDP growth by around 0.1% pa. Which may not sound much, but it’s cumulative, so over a decade, a sustained one percentage point reduction in government’s share would be expected to lift the level of GDP by about 1%.

(Put the other way, it means that Labour’s public spending splurge since 2000 has already depressed our trend GDP growth rate by around ¾% pa – see TPA paper).

Second, there is another stack of evidence that says higher growth improves the public finances.

According to HM Treasury’s own analysis, written by none other than Ed Balls:

British taxpayers are in serious jeopardy of a once-in-one-thousand-year stuffing. With Mr Brown in Washington to discuss the crisis with President Bush this very day, the Simple Shopper – the same Shopper who can’t even be trusted to buy Post-It notes – is now lining himself up to buy a pile of incomprehensible toxic debt from a bunch of fast-talking bankers.

It’s a very worrying prospect.

Look, nobody would start from here, but taxpayers should not be forced to bail-out bankers. It’s as simple as that. And as we’ve argued already, in situations where we have to step in to protect depositors and head off systemic collapse, we should demand a big equity stake in the company. Existing shareholders must be diluted right down (see this blog and this).

This is precisely how Sweden tackled its banking crisis in the early 90s. Just like with our banks now, Swedish banks had got into extreme difficulties on the back of a property boom that collapsed. And just like now, they banged on the government’s door for help. But:

"Sweden did not just bail out its financial institutions by having the government take over the bad debts. It extracted pounds of flesh from bank shareholders before writing checks. Banks had to write down losses and issue warrants to the government.

That strategy held banks responsible and turned the government into an owner. When distressed assets were sold, the profits flowed to taxpayers, and the government was able to recoup more money later by selling its shares in the companies as well.

“If I go into a bank,” said Bo Lundgren, who was Sweden’s finance minister at the time, “I’d rather get equity so that there is some upside for the taxpayer.”

And this is effectively what Mr Paulson has already done with his rescues of Fannie, Freddie, and AIG: existing shareholders have been subordinated to taxpayers in terms of future returns from the rescued companies.

Note too the insistence that bad debts are written down to their true estimated value before any rescue is agreed. The fear that banks are not fessin’ up to the true scale of their likely losses is one of the most toxic elements in the current situation – it has destroyed trust between the banks themselves.

The Swedish bank rescue is widely viewed as one of the most successful ever, and it’s contrasted with the failed approach of the Japanese authorities in roughly similar circumstances at about the same time.

The Japanese failed to grip the issue of bad debts. They allowed their banks to limp along without being forced to recognise reality, and the country was hobbled for more than a decade with a bunch of what became known as Zombie Banks. With a broken financial sytem, the Japanese economy suffered a decade of extremely low growth (under 1% pa). Whereas the Swedish economy was back on its feet in three years, and grew by 3% pa over the subsequent decade.

The fact is nobody knows what this toxic debt is worth. There is no proper market in it, and nobody even knows how much there is: figures of $1 – 2 trillion get tossed around, but nobody knows.

In these circumstances, sending the Simple Shopper down to the market with our wallet, our chequebook, and the deeds to our house, is terminally bonkers.

Let’s say to the bankers, yes we’ll take your debt, but this time we want the deeds to your house as well. You can go on living it it, but on our terms, and on the understanding that you help clear up the mess you’ve made. And when we finally come to sell up, we have first dibs on the proceeds. Or would you bankers rather go and work down Walworth Market?

Taxpayers are no longer able to avoid incurring cost here. But we should insist any rescue is on our terms. We should not get scared in into a bailout dictated by bankers.

Thanks for reading.  If you agree with our campaign for lower taxes and want to know more about the TPA, you can register online, completely free of charge, here.

Last night your correspondent gave up on the BBC hysteria of Mssrs Webb and Peston, and instead surfed the US News channels. He wanted to find out what’s really going on with US Treasury Secretary Paulson’s $700bn TARP (Troubled Asset Relief Program). Unfortunately, what he actually saw was enough political grandstanding to bring on one of his dizzy spells.

To start with, members of the Congressional Committee grilling Paulson and Bernake on live TV seemed concerned mainly with mouthing off for their constituents back home – long written statements followed by the weakest kind of underarm deliveries imaginable. They made our own Public Accounts Committee look like a lion’s den in comparison.

Then one of the Washington TV pundits explained that the actual deal had already been done with Congressional leaders behind closed doors in one of their smokefree rooms. The Committee hearing was simply so Representatives could cover their own backs with voters: "we had to pass it because the Administration told us the world would collapse if we didn’t – you heard them!"

Suddenly Senator McCain popped up in front of two US flags to announce he was putting his campaign on hold so he could personally supervise events back in Washington. He looked rather old and a little desperate.

Shortly afterwards Senator Obama appeared in front of another two US flags to say he was not putting his campaign on hold, and that McCain shouldn’t have rushed out to grandstand for TV. Even though he himself seemed to be doing precisely the same thing.

The pundits on Bloomberg talked more sense. They said nobody has a clue how the Paulson plan will work in practice – even Mr P doesn’t know that. But something has to be done, and this is it.

Oh, and taxpayers will likely get stuffed. Which is a shame, but what can you do?

We can only thank God we’re not US taxpayers. The bankers have apparently panicked and blagged their way into a $700bn get-out-of-jail-free card.

OK, they’re not quite getting out free – bank shareholders have already taken a serious whack, and banks will face much heavier regulation from here on. But being able to offload their toxic debt assets onto taxpayers is one huge weight lifted from their shoulders.

The key question now is price: at what price will the TARP buy these assets?

We’ve recommended the debate taking place on the FT Economists’ Forum already, and there’s a good summary of the pricing issue here. In the absence of a real market price from a functioning market, there are a wide range of possible pricing bases. They run from full nominal value – ie 100 cents to the dollar – to fire sale prices, which are maybe 20-25c to the dollar.

Clearly from a taxpayers’ perspective it would be best to go for the fire sale – at that level, taxpayers might reasonably expect to get all their money back eventually. But the problem is that the banks can’t afford to sell at that price – quite simply, it would wipe out all or most of their equity, and they’d have to shut up shop.

So the actual price is likely to be driven not by what this stuff’s actually worth, but by what price the banks need so they can stay in business. Which means taxpayers will almost certainly overpay for the assets, while bank shareholders are left with the full equity stake in their now detoxified bank: a pure gift from taxpayers to bank shareholders.

Why on earth should taxpayers accept that?

A much more appealing idea (as we blogged here) would be for taxpayers to take a big slice in the equity of the banks. They’d still have to stump up the $700bn – or whatever it finally turns out to be – but they’d now have a share in the eventual upside from keeping the banks in business. Which means that existing shareholders would take less (ie they would be diluted): a much fairer arrangement.

Now, given the current crisis, it’s probably too late for US taxpayers to insist on that. But it isn’t too late for us.

What precisely is our government planning to do when another of our banks comes begging? Given the Crock fiasco, do they now have a plan? How will they ensure that any further bailouts are accompanied by bank shareholders being "crammed down" (which of course did eventually happen with the Crock, but only at the cost of full nationalisation).

What’s the deal? It’s time we heard so we can start debating it now, not in the midst of the next crisis.

Yesterday, the Prime Minister listed the key achievements of the Labour government. Well, he actually told us how Britain would have suffered had the Tories remained in power:

"No paternity leave, no New Deal, no bank of England independence, no Sure Start, no devolution, no civil partnerships, no minimum wage, no new investment in the NHS, no new nurses, no new police, no new schools."

It’s a stunning list, because virtually every one of Mr Brown’s items has featured regularly in BOM as being clear cases of government failure, and a serious drain on taxpayers and businesses. Let’s run through them:

• Paternity leave and the minimum wage - these are part of Labour’s mega-package of labour market regulation, which has imposed such heavy additional costs on British employers. Even during the good times they have had a seriously damaging effect on employment in depressed low productivity areas such as Dewsbury (see this blog), and in low-wage occupations like agriculture, cleaning, catering where "protected" domestic workers have been displaced by hundreds of thousands of less well protected migrants. The problems are about to get much worse in the economic downturn.
• New Deal – As the Public Accounts Committee discovered last year, the government’s welfare-to-work programme, the New Deal, has been an expensive fiasco (eg see this blog). Despite costing us some £6bn, we still have 4.2m people of working age living in workless households, the vast majority of whom are supported by taxpayers. That costs us an estimated £12.7bn pa, including £3.4bn pa on benefits for lone parents (source: NAO Report). It’s equivalent to nearly 4 pence on the standard rate of income tax. Even worse, most of the individual New Deal programmes cost taxpayers far more than simply continuing to pay the benefits – one especially daft programme costs an eye-watering £76,540 per job.
• Bank of England independence – as we’ve blogged many times, BoE independence in terms of monetary policy is A Good Thing, and the Tories should have done it when we crashed out of the ERM. But the way that Labour – and more specifically, Brown himself – actually implemented independence, has been An Unmitigated Disaster. For reasons known only to themselves, they packaged independence with stripping the Bank of prime responsibility for bank oversight, and transferred it to the half-baked low-skill FSA. The new arrangements have been slammed by everyone, including the Labour dominated Treasury Select Committee (eg see this blog). Their failure will cost us billions.
• Sure Start – frankly it’s baffling that Brown still mentions this £5bn+ fiasco, when virtually everyone, including Tony Blair, admits it has totally failed. It has not helped the bottom-of-the-pile children it was designed for, but has largely gone to better-off families who didn’t need the help in the first place (eg see this blog). But there are now so many public sector jobs dependent on it, it’s taken on a life of its own.
• Devolution - this is another complete mess. As we’ve noted many times (see here for all BOM Scotland blogs), by devolving spending authority without devolving tax-raising responsibility, Labour has given us the worst of all worlds. English taxpayers are increasingly resentful of Scotland’s higher public spending allocations, and the Union is under threat as never before.
• Civil partnerships – hurrah! One item on Brown’s list that he actually can boast about. But let’s not get carried away – after a flurry during their first year, the number of civil partnerships halved last year to just 8,728.
• Minimum wage – see above
• Investment in the NHS – first, let’s revert to calling it spending on the NHS, shall we. And yes, Labour has massively increased spending – it’s almost tripled since 1997-98, a 70%+ increase in real terms. But the results have been dismal. We still lag Europe on most measures of health outcomes (like cancer survivorship), and according to the Office for National Statistics, NHS productivity has been falling by 2-2.5% pa (see this blog).
• Nurses – yes nurse numbers have increased – from 320,000 in 1997 to just under 400,000 now. But there are increasing doubts about the way nurses are used, from "too posh to wash", through to the amount of admin work now landed on them, through to so-called nurse quacktitioners supplanting doctors. Moreover, during the giant recruitment splurge earlier this decade, many overseas nurses were employed, some of whom lack the necessary language skills, and who subsequently blocked the recruitment of newly and expensively trained British nurses. Finally, because of initial over-recruitment, nurse numbers have actually fallen since 2005. In reality, it’s another expensive shambles (see many previous posts, eg here).
• Police – yes again, numbers have increased – from 127,000 in 1997 to 140,500 now. But when the Home Affairs Select Committee probed this last year, they pointed out that police numbers had increased far less than police budgets – only one-quarter as much – and they reported a depressing catalogue of inefficiency and mind-boggling paper mountains. Police on the beat, it isn’t.
• New Schools – yes, Labour has spent a packet of our money on new school buildings – many funded via over-priced PFI contracts. Moreover, they are planning to spend a further £50-70bn over the next decade in a crazed binge to rebuild 3,500 secondaries and half our primary schools (see this blog). But of course, what matters is not the school buildings, but what happens in them, and on that we have endured another decade of dumbing down and social engineering. Among other things, A Levels are now two whole grades easier (see this blog), and we have crashed down the OECD league table of educational achievement (see see this blog).

Look, Labour governments always spend vast amounts of our money. That’s what they do. We all surely know that when we vote for them.

We also know they always confuse spending with results.

But rarely have we had such a clear illustration of how they can see success in a record of unmitigated failure.