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What should matter most is what's happening to our own economy, not how we're doing compared to everyone else.

But that's not the way human nature works. As Gore Vidal once said: "it's not enough to succeed. Others must fail." And right now it's the UK that seems to be failing.

As commentators were quick to note this morning when the latest GDP figures came out, a sixth consecutive quarter of economic decline means that the UK is still in recession, while Germany, France and Japan are all now recovering.

Their economies all grew between April and June. They will probably have grown in the third quarter as well, and we're expecting the US to come out of recovery when we get their third quarter figures next week.

So, what's the problem? Chancellor Alistair Darling suggested in an interview for the Βι¶ΉΤΌΕΔ today that the likes of Germany and Japan had much sharper losses in output at the start, which would lead you to expect a sharper rebound.

It is true that the comparison between Britain and other countries looks a bit better when you compare the total decline in national income from peak to trough (or from the start of the recession until the end).

On that basis, Germany lost 6.7% of national income over the course of its recession. And many German economists don't think their country is out of the woods: they think another quarter or two of negative growth is quite possible.

Assuming the UK comes out of recession in the last three months of the year - and we're learning not to assume anything - then the overall loss of output for the UK would be somewhat lower, at 5.9%. The total decline for Japan has been a whopping 8.4%.

It is France and the US that come out best. The peak-to-trough decline for France will have been 3.5%. Assuming the US has now come out of recovery, its loss in income will have been 3.7%. (Thanks to Chris Apostolou at Fathom Consulting for pulling the numbers together for me).

The latest consensus forecasts are for growth of 1.3% in 2010 in the UK, similar to the government's own forecast. The prediction for Germany is 1.4%, and for France it's 1.2%. The US is expected to grow by 2.6% - but that, too, is a good deal lower than you would usually expect coming out of a steep recession.

Looking ahead, the similarities are greater than the differences. The road to recovery is expected to be fairly slow in all the major advanced economies, the UK included.

When you ask economists to explain why Britain is lagging behind, they can provide any number of reasons - particularly our greater reliance on the financial sector compared to our neighbours.

That prior dependence on the City, along with the poor state of the public finances and our long-term need to increase saving, could well lead us to enjoy slower growth than other economies in the next few years. But right now, we shouldn't fret too much about "falling behind".

It may not be comfortable for the government, but the truth is it's better for our economy to have other markets recover than for all of us to remain in recession.

After all, the cheap pound can't help British exports - or a long-term re-balancing of our economy - if there's no-one out there who wants to buy.

Growth in the rest of the world may rankle. But our own recovery won't get far without it.

PS Sorry a data mix-up resulted in earlier figures being different.

The preliminary estimate for a fall of 0.4% in the third quarter is - and formally makes this the longest period of consecutive falls in national income since comparable records began.

Many economists have said they expect this recovery to be slower than usual. But, if right, these data suggest it has not yet even arrived.

The very weak state of bank lending - and low state of household and business confidence in the UK and many other economies - are still taking their toll.

News of further falls in manufacturing and industrial output earlier this month had suggested that the figures might be weaker than initially hoped. But most expected the service sector to show modest growth.

However, the Office for National Statistics (ONS) estimates that output in this sector - which accounts for by far the largest share of the economy - showed another slight fall in the past three months, of 0.2%.

I suspect that the further decline in the service industries in the past quarter is a large part of the reason why so many forecasters have been caught short.

But it is worth remembering that the ONS does not have complete data for that part of the economy at this early stage - far from it. It is quite possible that the number will be revised.

Historically, official output numbers have tended to be revised upwards, over time. But this has been less true in recent times. The estimate for the first quarter of this year was eventually revised - downwards - by 0.7%.

The bottom line is that we should take this as very much a first draft of UK economic history - but clearly a disappointing one.

Update, 11:34: There's been a rapid response to today's figures from Ben Broadbent, of Goldman Sachs, who has long argued that the ONS was understating the strength of the economy.

To say he thinks the figures should be treated with a grain of salt would be an understatement:

"Do today's data tell us anything about what is really going on in the economy? Probably not. In the past, the ONS's early GDP estimates have contained no statistically useful information about growth. In the 10 years to 2007Q4 (the latest quarter for which we have fully reconciled UK GDP data), the correlation between quarterly GDP growth according to the first release and quarterly GDP growth based on the most recent data is only 0.10. In a regression of the latest quarterly growth on the first quarterly estimate, the coefficient on the early official estimate is not significant. The correlation between the UK's latest data and the Euro-zone's first release is much higher, with a correlation coefficient of 0.34. Amazingly, if one wants to know in real time what is happening in the UK economy, it has been better to follow the Euro-zone's early GDP estimates than the UK's GDP estimates.
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"The data also run contrary to pretty much every other indicator of UK growth. The Composite PMI - which has historically been a more reliable indicator of UK growth than the ONS's preliminary estimate - is consistent with growth of +0.7%qoq." "

Broadbent notes that it's not just the PMI data - car sales, retail sales, net exports, housing starts are all growing at a pretty good clip. And it's curious, to say the least, that employment seems to be stabilising even as output (officially) continues to fall.

For the non-statisticians amongst you, the shorthand way to express those correlation numbers would be that you'd not be much worse off tossing a coin to find out where the economy was headed. I look forward to hearing the ONS response.

Update, 17:30: I promised you a response: this just in from ONS.

"ONS produces the earliest estimate of GDP of any of the major economies, around 25 days after the reference quarter - on 23 October for July-September 2009. This provides policy makers with an early estimate of the real growth in economic activity, but this is inevitably revised as the underlying data sources mature. However, we are open about how much our preliminary estimate later gets revised - over the last five years, the average absolute revision (that is, without regard to the plus or minus sign) has been only 0.03 percentage points between the first estimate and the one a month later, and 0.08 percentage points between that estimate and the third estimate a month thereafter. We are confident that today's figure is our best, central, estimate at this point in time."

I suspect the Goldman boys would say the big revisions happen after the first three estimates referred to here, perhaps a year or two after the event, when the ONS reconciles the output data with more complete information on the amount of spending in the economy, and people's incomes. But I'll let you know what they say.

Mervyn King thinks that the government's efforts to fix the financial system have not gone nearly far enough - and could even be founded on a delusion. That's the not-very-hidden message of .

It's not just this government that is being too timid. King thinks the entire G20 approach to reforming financial regulation may eventually have to be re-thought. Why? Because it's partly based on the assumption that once you have told banks that they are too important to fail, you can somehow prevent them from taking crazy risks on the taxpayers' dime.

"It is important that banks in receipt of public support are not encouraged to try to earn their way out of that support by resuming the very activities that got them into trouble in the first place. The sheer creative imagination of the financial sector to think up new ways of taking risk will in the end, I believe, force us to confront the 'too important to fail' question."

This cri de coeur does not come out of nowhere. For some time now, policy makers and regulators around the world have recognised that rescuing the financial system had left them with what we economists might call the mother of all moral hazard problems.

In the past, bankers might have suspected that the taxpayers would bail them out if they got into trouble. But thanks to last autumn, they now know for sure.

This is what has been keeping a lot of central bankers awake at night the past few months: if they took all those risks before, when they couldn't be sure they had a safety net, what on Earth are they going to get up to, now that the insurance is there for all to see?

Mervyn King has voiced many of these concerns in the past. But never this bluntly, at least in public. Here's another killer paragraph:

"To paraphrase a great wartime leader, never in the field of financial endeavour has so much money been owed by so few to so many. And, one might add, so far with little real reform. It is hard to see how the existence of institutions that are 'too important to fail' is consistent with their being in the private sector. Encouraging banks to take risks that result in large dividend and remuneration payouts when things go well, and losses for taxpayers when they don't, distorts the allocation of resources and management of risk. That is what economists mean by 'moral hazard'. The massive support extended to the banking sector around the world, while necessary to avert economic disaster, has created possibly the biggest moral hazard in history. The 'too important to fail' problem is too important to ignore."

Logically, there are two solutions to the "too important to fail" problem. One is to accept that such institutions exist, but to impose tough regulations to reduce the chance that they will actually fail. That is broadly the approach being taken by the G20, with a belt, braces and chewing gum approach that will require banks to hold more capital, including more liquid capital, and put caps on total leverage (debt).

The governor says this approach "has attractions but also problems". We never hear about the attractions. But there are two pages of problems, the most important being that you never really know how much capital a bank is going to need - and we've been chronically bad at guessing it in the past. He says that requiring banks to issue "contingent capital" is an important way to beef up this approach. That is debt which turns into equity once certain emergency trigger points are reached. But you still have the basic incentive problem created by the belief inside the banks that they are too important to fail.

We knew that King favoured the more radical alternative - which is to "find a way that institutions can fail without imposing unacceptable costs on the rest of society". In essence, this comes down to separating out the essential, humdrum utility side of banking from the speculative, more casino side that has got us all into so much trouble. We taxpayers only underwrite the bit that's crucial to the broader economy, and by its nature doesn't involve so much risk.

Respectable voices such as the economist John Kay and Paul Volcker, the former Fed Chairman, have put forward suggestions along these lines. But it's fair to say that it has been dismissed as unworkable by the most mainstream opinion, including that of the chancellor.

The Conservatives have rushed to applaud the speech, and to remind everyone who will listen that George Osborne has said he thinks there is a case for separating some of the riskiest investment bank activities from plain old vanilla banking. But he only wants to pursue the idea at an international level. As a unilateral UK policy, the Tories have also dismissed it out of hand.

In his speech King says "it is hard to see why" it would be impossible to distinguish between different types of banking. After all, regulators do so all the time. "What does seem impractical, however, are the current arrangements".

In his blog, Robert Peston has often pointed out how un-radical the post-crisis reform agenda for banking has turned out to be.

For his part, , arguing that the financial sector has emerged rather less secure than the one we had before, and urging greater boldness. "The financial system is so inherently fragile that radical reform cannot be pronounced dead. It is only dormant."

Now Mervyn King has used his bully pulpit as Bank governor to turn up the volume on this debate. I doubt he did so lightly. But quite simply, he thinks that with the current approach, we will only have tackled the symptoms of the problem. The ultimate cause will come back to bite us - perhaps rather sooner than we might have thought.

The governor may not get his way. But in a week when policy makers and ordinary taxpayers are reading in disbelief of , just 12 months after the biggest financial bailout in world history, his speech will add fuel to the fire.

PS: An earlier version of this post mentioned a line which was in the text of the governor's speech, but not in the speech as delivered (an extract of which is now embedded above).

We don't know whether mortgage lenders can be trusted to look after their own interests - but we're fairly sure they can't be trusted to look after ours. And nor can we.

That is the basic message of from the FSA on .

In a world where all major financial institutions (and a lot of minor ones too) are essentially being underwritten by taxpayers, it's not clear where "their" corporate self interest ends, and the broader public interest begins. But we have known since at least the start of the year that Lord Turner's FSA was going to stop assuming that bankers knew best.

We've been hearing some of the implications for how much "core" capital banks need to hold, their stock of liquid assets, and their overall amount of debt - or leverage. One message of this report is that we should expect those reforms profoundly to affect the mortgage market as well.

If banks can't borrow as much as before, and have to hold higher capital reserves against riskier forms of borrowing, that can, and surely will, affect the quantity and quality of mortgages they offer. Of course, the decline in the housing market has done a lot of that already.

You might think that those broader regulations ought to be enough to fix the mortgage market too. And the FSA partly agrees. If you think the problem before was that banks and building societies weren't putting enough capital or liquidity aside to protect against bad mortgage debt - the regulators think that problem will largely be solved by those broader reforms.

But they don't think that's the whole solution - because it does nothing to protect individuals from getting into serious difficulties. In fact, as the FSA points out, they may be so desperate to borrow that they are willing to pay high charges which make the loan profitable for the bank, even though the charges themselves give the individual an even greater risk of becoming unstuck.

That broader reform of capital standards also does nothing to address the problem that there were a lot of non-banks providing the riskier kind of loans.

These lenders had far fewer controls in place to protect either lender or borrower than the mainstream banks and building societies, and were responsible for much more than their fair share of overextended borrowers - and mortgage defaults. Since they only came into the market in the boom years, and got out when prices fell, they also made the boom and bust cycle that much worse.

Thus the FSA's decision to single out self-certified mortgages for abolition - and all other products which do not require proof of income. These accounted for a shocking 49% of mortgages in 2007, a large number from specialist lenders.

As the authors of the paper note, tartly:

"No other country that we assessed for comparative purposes featured a similarly significant NIV (non-income verified) market segment, with the exception of the USA and Ireland, both of which have experienced a boom in mortgage credit and house prices followed by a severe reduction in both."

In other words, we were not in good company.

It is quite true that this step could end up making it harder for some self-employed people and others with irregular incomes to get a mortgage. But it's difficult to see how you could address the problems that the FSA has set out to solve without imposing slightly higher logistical hurdles on these borrowers.

It all comes back to the same basic logic. If we think it was too easy to get a loan in the boom years, then the 'solution' has to involve making it harder. At least for some people. The challenge is to make sure it's the right people.

Precisely for that reason, I suspect the FSA is right to shy away from simple limits on loan-to-value ratios or loan-to-income ratios.

The surprising facts are that loan-to-value ratios actually fell from 1995 onwards. It was loan-to-income ratios that rose as house prices took off in the boom. But, it turns out, a high loan-to-income ratio is not necessarily a good sign of the risk that a borrower will default. Much better indicators are the type of loan (ie whether it's self-certified), the borrower's credit rating and, crucially, their other expenses.

That is why, among other things, lenders are going to be asked to assess affordability - not just relative to income or to the value of the house but also relative to the individual's lending capacity, and their other spending.

This could be an Achilles heel in the FSA's proposals. Because, with the best will in the world, it's hard to assess how individuals really spend their money. And people do tend to underestimate their regular expenditure. The paper doesn't expect lenders do go through the receipts in your wallet - merely that they "check that the level of expenditure declared by a consumer is plausible." That leaves plenty to argue about after the fact, if the loan goes wrong.

The bigger point is that there will still be bad mortgage loans under any plausible regulatory regime - and borrowers will still get into arrears. And giving lenders responsibility for checking affordability cannot mean that they are judged responsible for all and every default.

But if the FSA has its way, lenders will not be able to actually profit from borrowers going into arrears. That will remove one major incentive to lend people slightly more than they should borrow. They will also be required to do their own due diligence rather than simply leaving it up to us. Those seem like two sensible steps in the right direction.

How can the banks be back paying mega-bonuses, just a year after Lehmans collapsed?

That's the question that many outraged citizens in Britain and America have been asking the past few days.

But for economists, there's a much bigger question: how will banks meet the cost of writing off all the bad debts they still have sitting on their books - and help fund an economic recovery as well?

The IMF recently reduced its estimate of the total bank losses for banks in the major markets as a result of the crisis - from around $3.8 trillion to $2.8 trillion. That's the good news.

The bad news is that, collectively, they are less than half way through the job of recognizing those losses and writing them off.

The Fund reckons that US banks are about 60% of the way there. But in the UK and the euro area, the figure is more like 40%.

Put it another way, the Fund thinks that around 60% of the Β£400bn in British bank losses as a result of the crisis has yet to be written off.

That has gloomsters such as Danny Gabay, of Fathom Consulting, predicting a second wave of the banking crisis here in the UK. He says we've had the first, foreign, wave. That took out a large chunk of lending capacity in the UK.

But the domestic wave of the crisis could still be ahead. And if the banks are still mired in debt, they will surely be reluctant to fund a full-blooded recovery.

As I said, that's one of the darker views out there. I might add that Gabay thinks the good news on the labour market is a false dawn as well. Most see the smaller than expected rise in unemployment as reason to hope that the labour market has become more flexible.

He thinks it shows the market has been even slower to adjust than it has been in the past, and a much larger rise in joblessness is still to come.

More upbeat analysts point to the sharp fall in the cost of bank funding since the start of the year. With so much liquidity sloshing round the system, they think it's only a matter of time before bank lending starts to pick up as well.

In other words, they say the recovery scenario is still on track.

And, of course, the IMF could be wrong about the total bank losses as a result of the crunch. It is something of a moving target.

That is all quite possible. We will get further clues on the state of the real economy when we get next week's preliminary estimate for third quarter GDP in the UK (though not that many more, given how much these preliminary figures are usually revised).

But for , Chief Economist for , it is simply impossible to generate a healthy recovery out of the kind of credit contraction we're still seeing around the developed world. "The next leg of this credit crunch will be the effect of a prolonged period of credit retraction among small and medium-sized enterprises."

Indeed, he see the contraction in bank lending to companies in the UK as a sign of more to come in the US and Europe (see chart below from one of Weinberg's recent reports). In his view, all the major economies could well be shrinking again by the turn of the year.

I'm not sure I'm that gloomy. But for anyone caught up in the euphoria on Wall Street and in the City in recent weeks, the still enfeebled state of lending to ordinary businesses around the world ought to be pause for thought.

I knew we hadn't heard the last of fungibility.

The latest chapter of revolves around the issue that I wrote about when the scandal first broke - which was then only lurking in the sidelines.

Put bluntly, an economist would say it doesn't matter what MPs say they spent their expenses on. What matters is how much they got.

Why? Because as I explained in that earlier post - economists (and lawyers, and accountants...) tend to think money is fungible. If you give me a pound to buy a newspaper, you don't expect me to buy it with that same physical coin.

You can't even guarantee that it's the newspaper purchase you are making possible. I might already have a pound in my pocket for the paper - and use your pound to buy chocolate. You can't say for sure, even if I give you a receipt.

The parallel with MPs' expenses - for any who missed it - is that all you can say about an MP who receives Β£20,000 towards their mortgage payments is that they have Β£20,0000 more to play with, and that they have mortgage costs of Β£20,000 to pay.

They might have had enough money to pay the mortgage already - and the money from the taxpayer is actually funding an exorbitant cigar habit. We will never know.

The MPs who received much less than Β£20,000, but are being forced to pay back money, grasp this concept implicitly. That's why they think it's unfair that mortgage payments are not being limited retrospectively - though it looks like they will be in future.

"Fungibility" is an ugly word (someone commented at my previous post that it wasn't a proper word at all). But you can't understand the true madness of the expenses story without it.

With the government now borrowing Β£175bn, . And if the proceeds aren't used for anything else, they could help cut the deficit over the next three or four years. But it can only be a short-term fix.

Asset sales could raise Β£16bn by 2013-14. Last week, . But the following year, 2014-15, Mr Osborne's proposals are supposed to be still saving the Treasury Β£7bn. Whereas in that year we can expect these asset sales to be saving approximately zero.

Why? Because, in theory at least, if you limit benefits or cut the public sector wage bill, you cut spending in all years, not just this one. The same cannot be said for asset sales. You can only sell an asset once. It can help a government cut borrowing in the year of the sale, but the following year it has to sell something else to get the same effect.

In practice, the distinction between the two is a little fuzzier. You could see some of the impact of the public sector pay freeze reversed if there are "catch-up" wage settlements later on. More importantly, any saving from raising the state retirement age will only last until 2026, when the government was already planning to make all of us retire later.

But the difference in kind between the Conservative proposals and these asset sales is still fairly stark.

That was my second reaction to the prime minister's comments when we journalists were told about them on Sunday night. My first was: "haven't we heard this somewhere before?".

We had. Back in April, on Budget day, the Chancellor said he was planning to sell Β£16bn-worth of assets over the next few years. Ever since then, the stock answer to criticism about the government's plans to halve public sector net investment by 2014 has been that there were all these asset sales in the pipeline - the proceeds of which would be used to top up investment.

The prime minister said again today that the asset sales would be used for investment as well as for paying down debt. But, to state the obvious, they can't do both at the same time.

Number 10 said today that asset sales were just one part of the government's programme to get public borrowing under control. Many economists would say that's just as well.

In fact, the rest of the speech focussed on other differences between Labour and the Conservatives on the economy - with Gordon Brown saying how difficult it would be for any government to cut borrowing if the economy doesn't return to health. I discussed this issue at length in my last post.

But, as I said then, the difference of timing - if there is one - must apply mainly to 2010. , the government is forecasting more than 3% growth in the economy from 2011 onwards. If that's not a time to cut public borrowing, when is?

found a simple way to tackle a complex economic argument about the deficit head-on. He said:

"[T]he longer we wait for a credible plan, the bigger the bill for our children to pay. The longer we wait, the greater the risk to the recovery. The longer we wait, the higher the chance we return to recession."

You can make a case for all three of those claims. The average person can also understand them. You can't always say that of a political leader's rhetoric on the economy.

What is more, the bulk of City opinion would sign up to the Cameron view. The financial markets almost always want governments to spend and borrow less.

Certainly, with a Β£175bn deficit, you'd be hard-pressed to find an economist who thinks the government is borrowing too little.

But it is important to note what Cameron did not say. He did not say that the longer we wait to cut the deficit, the bigger the bill for our children. He merely gave that impression.

He did not say that, because if he had, there would have been plenty of economists who disagreed, including Martin Wolf, the senior economic commentator of the FT and not a man who is known for his love of the state.

Of course, it's true in a tautological sense that borrowing will be larger tomorrow, if whoever is in power fails to make it smaller today.

The more interesting question is whether attempts to cut the deficit much more quickly than planned can succeed in a weak economy.

Why? Because, as I've said before, you're unlikely to be able to reduce borrowing as a share of national income (you may not even be able to reduce it in absolute terms) if national income declines at the same time.

Not only do you have a falling denominator (GDP), but you end up spending more on things like unemployment benefit, just as you are cutting elsewhere. Overall spending may not even fall.

If the next government withdraws too much demand from the economy, too quickly, that is what will happen.

I'm not suggesting that this is what the Conservatives will do. For all the rhetoric, I suspect that the shadow chancellor and his team know they can only take it so far.

That's why David Cameron spoke today only about the urgent need to have a "credible plan", not an urgent need to implement it.

Everything the shadow chancellor has said so far suggests that an incoming Tory government would pre-announce dramatic cuts for 2011 onwards, and some extra cuts - or tax rises - up-front.

But I'm not sure there would be dramatically more tightening in 2010-11 than Labour already plans. If the Tories won, they, too, would be looking at the strength of the recovery in making that call.

As I've said many times now, there might well be some economic benefit to announcing tough deficit cuts. We can expect the City to applaud, for all the reasons mentioned above.

And when you're borrowing this much, applause from the City is a very useful thing to have. That's why an early announcement of future cuts would make a lot of sense.

But we should remember that interest rates - short and long-term rates - are already extraordinarily low. In fact, one of the great surprises of recent months has been how easy it has been for the UK to fund this enormous deficit.

International comparison suggests that quantitative easing - the fact that the Bank of England is buying so many gilts on its own account - means that the interest rate on the British government's debt is perhaps 70 basis points lower than it would otherwise be.

But government bond yields have been low everywhere, despite record public borrowing.

In the Conservatives' view, interest rates will stay low for longer if there is decisive action on the deficit, which will help the economy. That's quite plausible. But it's hard to see how they could actually go much lower than they are today.

To believe that deficit cuts will bring lower interest rates - long-term ones, anyway - and boost the economy, you have also to believe that there will be a dramatic change to city sentiment - and a panicked rise in gilt yields - between now and the election.

In other words, you have to believe that the markets will start to doubt that a tough Conservative chancellor is about to take control. It's an interesting view for the opposition leader to take.

Enough already. If all of these permutations prove anything, it is that we now have an extraordinarily complex economic calculation at the heart of Britain's political economy.

David Cameron says "the longer we wait, the greater the risk to the economy". If we're talking about rhetoric, that is almost certainly true.

When you have a deficit as large as Britain has, politicians - whether they are in power now or have a good chance of winning it in future - all need to talk seriously about getting the nation's public finances under control.

If the government - any government - delays that conversation for too long, then they are indeed taking risks with the recovery. But when the prospects for private sector demand are uncertain at best, there are risks to translating that tough talk into action.

If any government does too much, too soon, then that could endanger the recovery as well. David Cameron talked of a plan today - not a timetable - because I think he knows that as well.

A bit more on how compares with the government's plans - and some of the potential savings that the shadow chancellor took off the table.

On the question of scale - and I have come up with a clearer way to think about the big picture. Though it's not for the faint-hearted.

You'll remember that the government has said it will cut borrowing by Β£45bn a year, in today's money, by 2014 (or 3.2% of GDP). To do that, they've said they will raise taxes by about Β£9bn.

The Tories today said they would accept those increases, at least for now.

As an aside, it's true that Osborne's speech leaves a question mark over the new 50p rate for the highest earners, because he would only say he would keep it in place until the end of the public sector pay freeze in 2012. But there's no firm commitment to get rid of it in the next Parliament, either. Of course, if the IFS is right that it won't raise very much money, keeping it becomes rather a moot point.

So, roughly speaking, both the government and the Tories have signed up to Β£9bn in tax rises between now and 2014. But even on the government's own plans, that still leaves a roughly Β£36bn cut in public spending between now and 2014 relative to what you might have forecast before the crunch.

Today Osborne set out his stall. But even if all of George Osborne's plans were adopted tomorrow - and achieved that Β£7bn a year cost saving by 2014 - you'd only be one fifth of the way to the total squeeze in spending that the government has pencilled in for the next parliament.

And - just to really do your head in - even if the next government meets that target, the Chancellor's Budget forecasts suggest that the deficit in 2014 would still be nearly Β£100bn. The Conservatives have said many times that they would want to move faster.

As Labour has been quick to stress, this analysis leaves out various Conservative spending pledges which do not appear to have been costed. For example, the Treasury claims that reversing what Osborne called Gordon Brown's "raid on pensions" would cost the exchequer Β£3-5bn a year. He committed the party to do that in today's speech. And the new allowance for married couples doesn't seem to have been factored into the shadow chancellor's numbers either.

It all goes to underline the point I made earlier - that you ain't seen nothing yet. The Conservatives have a lot further to go if they're going to match their plans to their tough rhetoric. (And, of course, so does the government. The pressure will now be on the chancellor to show how he plans to fill that Β£36bn hole next month, in his Pre-Budget Report.)

All in good time, the Tories might say. And there was a great deal that the shadow chancellor didn't announce in his speech. Whisper it softly, but if they're committed to tightening more than the government in the first year - it's tax rises, rather than spending increases, that can raise money fastest. For example, each additional 1p on the basic rate of VAT would raise about Β£4.5bn a year.

There are also still plenty of "middle class" benefits which Osborne left untouched today - presumably because he didn't want to scare every non-public-sector worker as well.

As I mentioned on Monday, getting rid of child benefit and child tax credits for families earning more than Β£31,000 a year would save a whopping Β£6bn a year. By limiting himself to just the child tax credit piece of that - and abolishing it only for families on incomes over Β£50,000 - Osborne will save a mere Β£400m a year. Whoever wins the next election, I'd be surprised if the next government leaves the other "middle class benefits" intact.

We shouldn't forget to be surprised at . Six months ago, he didn't like to use the word "cut" either.

But that was then and this is now. On the substance of what the shadow chancellor proposed, let me make two macro observations - with the caveat that there's plenty we still don't know. I'll say more on the micro in a later post - particularly the promise to make savings of Β£3bn by the end of the Parliament on cutting Whitehall, which could be hard to fulfil.

The first macro point is on the scale of the package. Assume, for a moment, that Tory officials are right and it would raise about Β£7bn a year - half a per cent of GDP - by the end of the next parliament, or Β£23bn in total over that period.

The government's budget plans would cut borrowing by about 1% of GDP - roughly Β£14bn - a year over the next eight years. So, assuming that the Conservatives spend no more than Labour in other areas, you could say they are taking the government's squeeze and raising it by another half a percent of GDP a year.

If nothing else changed (which of course it will, but bear with me) that would mean the deficit was still high by historical standards by the end of the next Parliament.

Let's be clear: this is not the limit of the Conservatives' ambition with respect to budget cuts. We may or may not get details of the rest of the squeeze this side of the general election - but you can bet there will be more to come.

Point two relates to the timing. As I've been saying for some time, the big dividing line between the Conservatives and Labour over the budget is over when you start to cut borrowing. Labour says it's too risky to cut while the economy is still weak - the Tories say that borrowing is too high to risk delay.

I've been surprised how willing the Conservatives have been to confront this argument head-on. As I have argued in the past, there is a respectable economic case for saying that tighter policy will help the economy more than hurt it - by building confidence in the markets and delaying higher interest rates (I'm not saying it's right, but it's perfectly respectable).

The trouble, for the Tories, is that Labour have intuition on their side on this one. Most people assume, understandably, that lower public demand in the economy must mean slower growth overall.

But what's even more interesting is that, on the basis of the plans announced so far, this enormous chasm in rhetoric belies a very small difference in what they would do.

As the IFS has pointed out, Labour's plans are front-loaded - they're actually planning to withdraw 2% of GDP - around Β£25bn - from the economy in 2010-11 by withdrawing the stimulus. Whereas today's plan from Osborne is highly back-loaded.

That Β£7bn a year saving is by the end of the next parliament. So is the Β£3bn a year to be saved on cutting bureaucracy. And the public sector pay freeze - the biggest single saving, doesn't take effect until 2011.

By my reckoning, these measures taken alone would only cut borrowing by maybe Β£2bn, if that, in 2010-11. Or at most 0.2% of GDP.

As I've said, I firmly expect that the Conservatives would squeeze more than this if they won the next general election. But on the basis of what we know now, the big picture difference between them and Labour in 2010-11 is pretty small. It's a good point to bear in mind - as they now go to war over the fine print.

For months, the two major parties have kept quiet on the subject of what, exactly they would cut. Now you can barely shut them up.

late Monday that he was recommending a pay freeze for top civil servants next year, and a strict 0-1% rise for 700,000 others. Barely two hours later, the Conservatives let it be known that to 66 for men much earlier than previously planned - for some, possibly as soon as 2016.

It's not quite the five stages of grief, but we seem to be past denial - to the stage where each side tries to claim ownership of the handful of less controversial options.

Whomever wins the next election, it has long been obvious that the next government would go for tighter public sector pay control - and a faster timetable for raising the state retirement age. In the most challenging fiscal environment that anyone can remember, each offered potentially large savings, at relatively little cost compared to the alternatives. They were too unterrible to pass up.

It's a solid rule of political economy that if it becomes clear that something will have to happen - it won't be long before politicians try to make it their own. And so it has proved.

On the substance of the two proposals - let me just make a few brief observations.

The first is that the Conservative proposal would save far more money over the long-term - though clearly it would not save much money between now and 2016 (or whenever they decide the new retirement age would kick in).

Tory sources say the change would save Β£13bn a year from the deficit, or a little under 1% of GDP. There's room to quibble with that number - for example, we don't yet know whether the change will apply to women, and if so, when. On current plans, the shift to 65 for women won't be finished until 2020.

The Conservatives say that the impact on women is "up for review" - in which case it's hard to see how they came up with the Β£13bn number. But getting people to work longer could clearly deliver this order of saving, albeit over a number of years.

In a paper I discussed back in May, the National Institute for Economic Social Research said that adding one year to our effective working lives would reduce public borrowing by 1% of GDP after 10 years, and reduce the national debt by 20% of GDP over 30 years.

For many in their late 50s, retirement is now firmly in their sights. It's not nothing to be asked to work another six years rather than five - especially if you've been a manual labourer all your life. But the pain will be concentrated among relatively few - and even many 58 or 59-year-olds will have been planning to work beyond 65 of their own accord.

This is a very tight timetable for a change that would normally be decades in the preparing. But it raises tax revenues and cuts pension spending in one stroke. It's not hard to see why the Conservatives decided to go first - before Labour claimed the policy as their own.

You could say the same of Labour's prospective pay "freeze" in the public sector, but that would suggest the two proposals were comparable - which I'm not sure they are.

One could eventually save at least Β£10bn a year. We don't know what the chancellor's latest pay proposals would save the government, but you can bet it will be in the low hundreds of millions a year. And that's if there is no "catch-up" growth in the pay bill later on.

Why so little? Because the vast majority of public sector workers won't be affected. The Treasury says that 40,000 senior workers will be affected by the pay freeze - and another 700,000 will see their pay rise next year limited to zero to 1%.

That sounds like a lot of people, until you remember that there are more than six million public sector workers in Britain - more than 2.5 million of them working directly for central government (including the NHS). And remember those 700,000 are being limited to a 0-1% pay rise, in a year when the government's own forecast is for inflation of just 1%.

Something tells me that George Osborne isn't going to let things rest there.

The Conservatives have kicked off their conference with "tough and tender" plans to get millions back in work. It's supposed to confirm that the party's priorities have changed. But the plan has also let one important cat out of the bag.

When it comes to the future austerity, public debate has so far focused on cuts to departmental budgets - as if other parts of spending are beyond government's control. But as the Conservatives show with today's plan, that is not strictly true.

If they win power, we know that departmental budgets will be squeezed. But it's an open secret that spending on tax credits and benefits - along with tax rises - will also be in the frame.

It's partly the fault of the that benefit spending gets left out of the discussion. That distinguished body estimated what Alistair Darling's budget would mean for departmental spending (DEL), long before we found out the true figures in that memo leaked to the Conservatives last month.

The IFS numbers have understandably set the debate, and they're not wrong. But they do brush some key details under the carpet.

When we say spending on departments will fall by 2.9% a year in real terms between 2011 and 2014 on the government's plans (or 4.9% per cent a year if the NHS and overseas aid are protected), it's the DEL total that we're referring to. But DEL accounts for only 58% of public spending. The rest is in the AME total - which includes spending on debt interest, social security and tax credits.

That spending has been growing more than twice as fast as DEL in the past few years, and some of it is indeed beyond politicians' control. But by no means all.

In fact, before 1998 a lot of what is now included in AME was bunched in with departmental budgets in the Conservatives' target measure of spending, called the annual "control total". The control total covered 85% of spending: the remaining 15% was roughly the true share of spending that governments could not easily control.

So much for the trip down memory lane. My point is? My point is that those "tough choices" on departmental spending get slightly less tough if you accept that benefit spending might also be squeezed.

In , the IFS calculates that you could achieve the government's targets with no real reduction in departmental spending by implementing tax rises or benefit cuts worth 2.1% of GDP - or Β£29bn in today's money.

Alternatively, a new government could reduce the deficit twice as quickly as the chancellor now plans, if it went ahead with the existing spending plans but cut benefits or raised taxes by Β£44bn over four years as well (the equivalent of Β£1,400 for every family in the UK).

How might such a sum be raised? Well, freezing all benefits in cash terms would save Β£15bn a year after three years. But as the Conservatives may discover today, cutting benefits for unemployed people is hard to square with "compassionate Conservatism" - even if supporters of reform say that not letting people languish on benefits is what David Cameron's party ought to be about.

There are plenty of other options. For example, the IFS estimates that you could save about Β£6bn a year taking away child tax credits and child benefits from families with incomes over Β£31,000 a year. The and the recently .

As I'll discuss in a later post, I think the is an odd target for a party that wants to promote equality of opportunity - and a national culture of saving. But they could save Β£500m a year by getting rid of it.

The list goes on. Suffice to say that there are plenty of benefits or tax credits that might be squeezed - not to mention taxes that could be raised.

Departmental spending is in for a tough time, whoever wins the next election. But it's only one part of the puzzle. Don't make the mistake of thinking the rest of the budget is set in stone - whoever wins the general election.

The average price of a house in the UK is now the same as it was a year ago - or . But even estate agents are wary of calling the turn of the cycle. And for good reason.

Of course, prices are still lower than they were - on average, prices in the Nationwide's index have fallen 13.5% since their peak in October 2007. But if you'd wagered a year ago - when the world was ending in the financial markets - that house prices were going to stabilise about six months later and be back to the same level within a year, you would have found plenty of people happy to be on the other side of your bet.

Is it too good to be true? I know better than to try to call the market - though, from the number of times I'm asked about it, it seems that many people think it's the most important part of my job. But here are two reasons to think the rally may run out of steam: one from Nationwide and one from the IMF.

Reason number one is well known but important: house prices are rising in a market where very few properties are changing hands. As the Nationwide points out in today's report, the housing turnover rate - the percentage of the private sector housing stock changing hands on an annualised basis - is still only 4%. That's not much higher than it was at the end of last year, when literally no-one in the market wanted to do anything. Before the crash, turnover was 7-8%.

You might expect prices to carry on falling in a market with such little activity - because usually low turnover reflects the fact that everyone expects prices to fall. But the relationship breaks down if there's only a tiny number of houses up for sale. That seems to have been true for most of this year and it's still true.

Nationwide thinks a lot of people have become "accidental landlords": with interest rates so low, they've been able to buy a new place but rent their old home, rather than selling outright. The authors say the resulting increase in the stock of rental properties explains why house prices have been rising for five months now - while, if anything, rents are now lower than they were last year.

The signs are that this stock of rental properties is now starting to fall off. If that happens, they think prices could go down again.

But that's the short-term dynamic. The more fundamental reason why prices might start falling again is that, by most measures, they are still significantly over-valued.

That's the IMF's conclusion in , out yesterday. It says the typical housing boom lasts six years and sees house prices in real terms go up by about 50%. Downturns last five years, during which time house prices in real terms fall about 24%.

The IMF folk compare that historical picture with what's happened in individual markets so far. They then go back and run more complex models with measures of affordability and other data. The conclusions are broadly the same: prices in the UK, Spain and Denmark all probably have quite a long way further to fall - in the UK's case, maybe another 12-13% in real terms. Whereas the US and Germany are probably close to the bottom. Remember this is about house prices in real terms, after inflation. You could get that 12% real decline if prices stayed flat for a while - but if inflation stays this low, you're talking quite a few years.

Capital Economics have a similar analysis (see graph below). They reckon prices would need to fall by at least another 20% in nominal terms to reach fair value. And many agree.

If prices stagnate, or fall further, there'll be plenty who worry about the knock-on effects for confidence and the economic recovery. But it would be good news for young people who are otherwise bearing the brunt of this economic bust.

From an economic standpoint, the rise in house prices since the early 1990s has been a massive transfer of wealth from young wannabe home-owners to the older generations who bought when the going was good. It's worked like a tax on young people -and a windfall to large numbers of the middle-aged and old.

One way or another - whether through higher lifetime taxes or unemployment at a crucial time in the career - young people are going to be paying for this crisis for a long time to come. It would be no bad thing if they could at least come out of it able to afford a home.