How much to spend on seo - what's the honest answer?

For 40 pages I'd work backwards from what a customer is worth. If a new client is worth a few hundred to you and SEO might realistically bring a couple a month after six months, you know roughly what you can afford. Before signing that proposal, check what they'd actually do. A 40 page site doesn't need a big retainer for technical work forever. After the initial fixes, the money should go on new content and getting a few links.