Labour are saying they would have a thorough review of public spending. They would examine everything currently being spent, using the technique of the zero base budget. Nothing is in such a budget until it is examined and newly approved.

There is a lot to be said for the Coalition government doing just such an exercise now. It is good advice from Mr Balls. If we leave it until after the next election, that gives another couple of years of potential wasteful spending.

It also, of course, means Labour can refuse to tell electors what they would cut were they to be returned to office. Their mantra can be permanently that it will all be up to the review. If the Coaliton behaved as Labour used to do in office, it could invent all sorts of cuts and claim that Labour was likely to do them if in office. Labour would then be drawn into denying certain things would be cut, pre-empting their thorough review. Such is the name calling and scaremongering that we have become used to accept as an alternative to having a mature debate about priorities and value for money.

What should such a review probe most strenuously? There are many easy targets. I list a few beneath

1. Network Rail’s large losses on derivatives and their foreign currency funding (£560m last year)
2. Early withdrawal of the troops from Afghanistan – for reasons mightier than merely saving money
3. Overseas Aid to countries that have nuclear weapons and space programmes (£485m)
4. Overseas Aid through the EU (£1.3bn)
5. The Overseas Aid Department’s large research programme and extensive use of consultancies (£800m plus)
6. The UK contribution to the EU budget
7. The size and growth of the EU budget
8. EU regional policy expenditures
9. Need to charge overseas users of the NHS
10.Subsidies to dear energy sources
11. Possible sale of state owned banking assets and companies
12. Sale of commercial forests that are not heritage sites and heritage woodlaands
13.Increasing the proportion of affordable housing for sale, so the state can release more capital from disposals
14. Stricter enforcement against illegal migrants coming to pick up benefits and other support payments
15. Repatriation of foreign prisoners

There are so many items that the list could extend for many columns. Your ideas, as always, could be helpful. The Coalition is going to have to look again at its high spending levels, given the slippage on borrowing. It’s topical again to consider priorities and better value for money.

Ed knows how to woo the Unions. His threat that the banks will have to be split, detaching investment banking from High Street banking, will be popular with the Unions. It will send a subliminal message to the many that Ed is on their side, because he is against the big banks.

It does not seem very likely,were there to be a future Labour government. After all, the last Labour government encouraged the build up of the large comglomerate banks. It welcomed the foolish mergers which brought about RBS. It flagged them through the system. The regulators just stood and watched as the debts were heaped up. It helped push HBOS into Lloyds arms. It left state owned RBS intact, and appointed management with the task of trying to make it a successful conglomerate.Seeking the break up would be quite a volte face from previous policy.

Simply splitting investment banking from High Street banking would not have stopped the 2007-8 crisis anyway. Northern Rock, Bradford and Bingley , Freddie and Fannie, were all regular mortgage banks. They were not brought down or put into financial difficulty by irresponsible investment banking arms. Threatening to enforce the split in a global bank like HSBC might simply lead to it leaving London, or might prove beyond any UK government’s jurisdictional reach.

The one bank that could be split up, and should be split up, is RBS. It is a pity the Labour government did not do it in 2008-9. It is a pity the incoming Coaliton government did not issue new orders and negotiate new requirements and contracts with the incumbent Board in 2010, and seek to break it up then. Cross party consensus on splitting RBS would now be welcome.

Those few of us who argued in 2008 that RBS should have been put into controlled administration, with short term liquidity support and proper deposit protection, were shouted down. Instead government decided to bail out the bondholders and lose a fortune on buying shares. Now we have won the argument for a “next crisis”. The Vickers Report, the FSA and the governmant all agree that any future large bank in trouble should be put into controlled administration, following its “living will”.

If that makes sense for a future crisis, why don’t we get on and do it now to clear up the large overhang of the last crisis? Whilst RBS is largely state owned, it provides a means of testing the theory.

First they came for the hedge fund managers. They had to be regulated, stopped from short selling, and taxed until they went offshore. They were uniquely to blame for the collapse.
Then they came for the investment bankers. They had to be bankrupted, subsidised, vilified and regulated. They were the crash.
Then they came for the elected politicians. They had to be condemned for their salaries and expenses.
Then they came for the elected governments. The Irish, Portuguese, UK, Spanish and Greek governments all were dismissed.
Then they came for the rich stars.A hypocritical comedian was dragged through the mire, a foul mouthed footballer was fined, many well heeled stars faced tax enquiries.
Then they came for the journalists. They were exposed for phone tapping and bribing.
Then they came for anyone with any income or wealth, and taxed them some more.

The EU is happy for others to take the heat, accept the blame, and pay the bills. They have not come for the EU Commissioners, the European Court of Justice or the European Central Bank. These bodies all claim they need more money and more power to right the wrongs and sort out the mess. They float above the crashing economies, the growing dole queues in Spain, Greece and Portugal, and the squeezed living standards. They turn a blind eye to the anger in the ballot boxes, and the trouble on the streets.

Are they blameless as they think? Who is responsbile for the mess of the Euro? Who is responsible for spending too much public money that taxpayers cannot afford to pay for? Who designed the austerity policies which many EU voters now dislike? Who created the rigid regulations that help deliver dear energy and badly working labour markets? Who watches as Asia out competes Europe?

Will the peoples of Europe ever think some of this is to do with their EU government? The modern EU is not of course embarked on violent repressions of freedom and voice, but it is failing to respond to the cries for help from many people in many countries.

Mr Hollande spoke with upbeat rhetoric to get elected.Now he is governing, he pores forth pessimistic language. He campaigned with optimism, he governs with pessimism.

His supporters will say he has to trim to the realities of office. They might argue that he did say in the small print of his manifesto that he too, like Sarkozy before him, needed to get the budget deficit down. Yet what most of us remember was the song “All you need is growth”. It is difficult to see where the extra growth is going to come from on his current policies.

Mr Hollande is right to take action to curb the deficit, even though it is already lower than the UK’s as a proportion of national income. I hope UK socialists will take note that a socialist French President wants the deficit below 3% of GDP, en route for 0%.

Where his policy is likely to prove damaging is opting to do so much of the adjustment by higher taxes. Mr Hollande may find, as Mr Osborne is finding here, that higher tax rates lead to a fall in tax income, or slow its natural growth. Mr Hollande’s income tax increases are so eye catching that they are a help even to London, which looks good value in comparison. Why wouldn’t well off and enterprising French people now go to Singapore, Hong Kong, or New York, to make their money?

There are only so many rich people to tax in the world, and they do tend to move around to lower tax jurisdictions. Mr Hollande will have to tax the not so rich as well, if wants to keep his public spending at current levels. His decision to reduce the retirement age has made it more difficult for him to control spending. He may find, as southern Euro states are finding, that deficits go up, not down as economies decline and as rich people find ways to earn less or move abroad with their money.

Growth requires realistic tax rates, stronger banks and private sector led activity. How is Mr Hollande going to provide that, with a diet of pessimism and higher taxes?

On Sunday the BBC provided a taxi, so I could appear on their Sunday Politics show.

The driver who took me home was a Romanian. He was smartly dressed in a suit. He spoke English well. He explained that he lived in a single room in East London. The house is owned by another Romanian with a mortgage. There are three bedrooms, all let out to Romanian workers. The landlord and his family live downstairs.

The driver works long hours. His family live in Romania. He tries to earn as much as possible for a few months, and then returns to be with his family for the summer holiday or the Christmas holiday. He minimises his expenses on accommodation, though still finds London property dear. He spends little on himself, as he wishes to send as much money back for his family as possible. He is paid only for the time he is driving with paying passengers in the car. He makes it work, and finds it easier to maintain his remote family on London pay and long hours, than from the unemployment ridden labour market of his home city. He joked that he is paying the mortgage of his Romanian landlord, who doubtless will end up richer and successful.

This driver, like many other recent arrivals, provides a good service, works hard and does not complain about his lot in life. The question is why do some of the longer term unemployed who have lived here all their lives not find the many service jobs available of interest for them? Why is London increasingly serviced by people who have recently come here and may be going back when they have earned enough money? This gentleman said there had been no problem getting the job or completing the short training to be out on the road.

As I have highlighted before, good intentions are continuing to make it less worthwhile to work. The addition of a 3% employer charge and a 4% employee tax for the NEST pension scheme comes on top of the 4% improvement in benefits relative to wages over the last couple of years. It is still getting less wortwhile for people settled here to work.

Yesterday we looked at why the Lib dems should be thrilled with the Coalition so far. So what is there for Conservatives to cheer?

It is true we have seen substantial progress to a £10,000 tax threshold for Income Tax. Any tax cut cheers Conservatives, though this one has been claimed as their own by the Lib Dems.

We did get the veto over the latest federal fiscal Treaty, something Labour and Lib Dems would never have done. We are promised opt out from a large number of Criminal Justice EU measures, again something the federal parties would not propose. We did see the end of the M4 Bus Lane.

We have seen the back of Regional Development Agencies, regional planning and much of the rest of regional government. Some quangos have gone, which is to be welcomed. The ending of the Home Information packs was good. So was the restoration of some of our ancient rights to habeas corpus.

Conservatives liked Plan A. That said eliminate the structural deficit this Parliament, relying 80% on spending cuts to cut it. Many Conservatives are disappointed that this has not been attempted.

Yesterday an amazed BBC was telling us that the delegates at the Lib Dem Conference are bravely sticking to the “tough” deficit reduction programme of the Coalition, despite their dislike of it. What a lot of disinformation in the same short news piece.

What is there not to like for a Lib Dem who wants to put up tax rates on the rich, increase state spending and increase benefits for the poor? The Coalition has followed exactly that policy.

The Lib Dems have been very good at claiming credit for the higher Income tax threshold, a policy supported by both Coalition parties. It has also claimed credit for the higher pupil premium for students from disadvantaged backgrounds, again a policy backed by both Coalition parties in their manifesto promises. It has left the idea that other nastier unspecified policies were the work of the Conservatives.

So far the government has done the following:

It has increased current public spending by £57 billion a year over 2 years, or more than 9% in cash terms, ahead of inflation
It has increased benefits by more than 8.5% over two years
It has abated the cuts in capital spending inherited from Labour, and is looking at ways to expand capital spending by the state
It has endorsed or imposed higher tax rates on earning, on buying expensive homes, on rich Nom Doms, on capital gains, on non food consumption, on foreign holidays, on driving and on employing people
It has greatly increased overseas aid spending
It has pursued a policy of very dear green energy
It has transferred powers to the EU and increased our spending on the EU budget
It has agreed to borrow an extra £550 billion over the life of this Parliament, an amount higher than the total state debt in 2004.

If I were a Lib Dem I would be delighted with it all, save the leadership’s unfortunate decision on tuition fees which they did not have to make.

On saturday I was asked to give a talk on the world’s economic problems to an international conference of young conservatives at Oxford.

I wanted to talk about the huge imbalances,as economists call them, that have caused the problems of boom and bust and Credit Crunch over the last decade. I decided to talk about two pairs of countries.

The first is the USA and China. Over the last decade the US has developed a large appetite for cheap Chinese goods. It wanted to buy many more than it could afford, so it borrowed the money to buy them. China was happy to keep her exchange rate down, to pay relatively low wages, and to sell the US more and more good value goods. China built up ever larger surplus funds from the profits of this trade. The US lent itself more and more money to buy these goods. China had to lend her surplus back to the US to prop up the US state and banks.

The US state paid poorer people in the US entitlements with money borrowed from China, so they could afford Chinese goods. It paid larger salaries and contract fees to individuals and companies to supply US defence and other programmes, also from money borrowed from China. These people could also then buy Chinese goods. Chinese people saved, as they do not have the same generous welfare system. Their country bought around $2 trillion of claims on the USA.

You can only do this for so long. To adjust, China has to pay itself better wages, and the US has to experience a fall in real incomes. The Chinese state can spend more, and the US state has to spend less. The Chinese currency has to go up, and the US currency to fall. More Chinese production has to be used to supply China, and less to supply America. The US has to expand its production, supplying more at home and exporting more abroad. These adjustments are beginning to happen. Chinese wages are rising well, and US real incomes are falling. US exports are rising.

The second pair of countries I looked at was Germany and Greece. Like the US and China, Greece has been spending too much and borrowing too much, and Germany has been building up a large surplus out of successful exporting. Greece has taken its excess further than the US and has a much weaker economy to try to correct. Worse still, by locking itself into the same currency as Germany, Greece has made it more difficult to adjust its economy to the new realities. It cannot devalue as the US is doing. Real incomes have to fall through cuts in wages, rather than through an adjustment to make imports dearer and exports cheaper via the exchange rate.

The adjustment has to happen through Germany sending Greece more money as grants and gifts, or lending Greece more money to pay the bills. If Germany refuses to send enough money, the downward spiral of the Greek economy could get out of hand. Greece needs to buy far fewer German goods, and supply herself with more. Greek people need to work more to export, and accept the lower living standards the Euro scheme is forcing on them.

The nearest the Greeks can get to a devaluation to solve part of their problem would come from a big move in tax policy. Greece could abolish or slash taxes on employment and earning, and impose much higher taxes on spending, to the extent that EU rules allow. This would make Greek goods cheaper by cutting the tax costs of production, and make consumption dearer, limiting the amount of imported goods that Greek people buy.

The top 1% of income earners in the Uk pay 28% of the total income tax take. As they earn 13% of all the income, that means they pay twice as big a share of the tax as their share of the income.

The bottom half of all earners in the UK pay 10% of the total income tax. The sum they pay in total is less than the amount paid out in Housing Benefit, which goes to this wide group of people.

You could say this is a very “progressive system”. the bottom half paying less than the benefits they receive back, whilst the top 1% pay twice their share of the income.

However, at a time of economic difficulty, when the government wishes to spend so much more than it is currently collecting in revenue, there are many cries to tax the rich more. To do this successfully you need to have a tax system which attracts more very rich people here, and which tempts rich people to invest, venture and spend in ways which trigger more tax revenue from them. The higher rates introduced by the outgoing Labour and incoming Coalition governments have led to a predictable continuing drop in revenues. Taxes on wealth and income yielded 3.5% less to August 2012 than the same period the previous year.

The USA has lower tax rates on the very rich than the UK. Top rate federal income tax is 35%, compared to 50% (plus 2% NI) here. State income tax varies from 0% to 11%. Allowing an average of around 5% means the US top tax rate is more than 10% lower than the UK one.

Despite this- or more likely because of it – the US top 1% earn 17% of all the income. More importantly , they pay 37% of all the Income Tax paid. So with lower tax rates the USA achieves the goal of getting the rich to pay much more. It also has more seriously rich people, which some will dislike and others will see as helpful to pay all that extra tax. In the US the rich pay more than twice their incoem level. They make an overall bigger contribution than in the UK.

My advice to Mr Clegg is simple. By all means aim to get more money off the rich. The way to do it is to set rates that they will stay to pay. Get the right tax rates and more will come to pay.

By all means get the tax burden down on those on middle incomes as well. We are all overtaxed. That is one of the reasons the eocnomy is not performing as well as we would like.

The Foreign Office is already sounding the retreat over the EU budget discussions. They imply that we cannot do more than work with Germany to keep the increase under control. They say that whilst we can veto the budget, the EU can always go on to month by month budgets if there is no long term agreement.

I think the budget is the best possible time and topic to highlight the difference between what the UK wants and what most Euro members want and need. A club advertised and sold to the UK people as a trade arrangement has become a project to create Europe as a federal country. The UK has to state clearly it wants no part of that mission. We want to trade with them, be friends with them, have sensible arrangements over flights and ferries, pipelines and communications links, maybe do some things together where both sides want to. We do not wish to be governed by them, be subject to a common wide ranging law, have to follow a foreign policy laid down on the continent or an immigration and criminal justice policy designed in Brussels. We want a different kind of relationship with them, or at the very least the veto restored over all important policy areas, so we can still make up our own minds if we wish.

The UK should state clearly why we regard much EU expenditure as marginal at best. In a budget crisis cutting EU spending would be an obvious relatively easy way of making some of the cuts we need. As a sovereign nation we should be able to do that. Just as Margaret Thatcher negotiated us a rebate, so this government needs to demand a cheaper membership for the UK wishing to be a trade member but not a fully integrated member of the EU, Euro and new political union. I appreciate many of you would rather just withdraw from the whole thing. There would still need to be negotiations over the issues of overlap if the UK electorate did vote to come out. As you appreciate, I have been trying to help secure us all a vote on this central issue of membership of the present EU, but a federally inclined Parliament refuses. The budget negotiations are likely to predate any new attempt to get a referendum, as nothing much has shifted in a Parliament which voted strongly against a referendum recently.

The UK could also set out how the overall budget could be cut for the benefit of all. It is unlikely they will see it that way, but it would highlight the paradox of the EU. The EU lectures states to cut spending and cut deficits, whilst making the task more difficult by putting up the bills.

If there is no agreement, moving to ad hoc monthly stand still budgets will not be comfortable for the Union. The UK should dig in and demand a better deal for us.