THE SHORT ANSWER is your guess is as good as mine, save for raising yet more tax. Rachel Reeves has claimed there is a £22bn black hole (around £750 for every family) but while she is correct the current position is, unsustainable in the longer term, the additional £22bn – if you believe it and I don’t – is largely of her own doing. Labour’s early decisions have made matters somewhat worse.
Labour has made matters worse by rewarding its own client base, the public sector, with some eye-watering pay rises. As salaries make up around 50% of all public spending (the remainder is largely debt interest, procurement, pensions and welfare payments) inflation busting pay rises not only add to the burden immediately, but also in the longer term through largely unfunded pension liabilities.
Worse, despite public spending increasing by over £200bn in real terms over the last five years there has been zero productivity in response. The Office of National Statistics’ (ONS) own data suggests that public sector productivity is lower today than in 1997, despite all the revolutionary technology over that period, as indicated by the chart below.
The first looks at the structural growth of the state – which it sees growing to Soviet levels of 60% over the next 50 years, and the second looks at the National Debt which on any measure becomes unsustainable fairly quickly even without the ‘shocks’ the OBR seems to expect.
It’s a slow burn but without a change of course we the people will simply become Brides and Grooms of the State. In 25 years the UK has broadly moved from the state sector accounting for a third of output to roughly half now. The OBR foresees that trajectory continuing and it is, for once, broadly correct, save of course for the likelihood the whole edifice would crash down under the weight of its own contradictions long before that point was reached.
In a world of fiat currency when the West remained the paramount power it might just be possible, albeit highly undesirable, but as other blocs notably China and India are following entirely different paths if such a policy was attempted it could only lead to an Argentinian style collapse. Britain and the rest of the West (which is not much behind) would be done. Who would buy the bonds? The Chinese? No. The Russians? Hardly. The Indians? Perhaps, but not at this interest rate. Or perhaps the dear Old Lady of Threadneedle Street might print a bit more? The Florin was 80% solid silver before 1920 you know, then 50% to 1948, then, well whisper it, nickel. Next it will be Central Bank Digital Currency.
No declines are identical of course. Either meaningful inflation, currency collapse, or indenture would result. Thank you OBR for are stating the obvious, but it’s not a debate the major parties are prepared to encourage, preferring incremental woe as the frog is slowly boiled.
No, Labour’s budget will spend further on unproductive and grossly inefficient public services and tax that bit more. On the detail it’s hard to say but we can be sure that already the UK’s reputation as a low tax, stable rule of law jurisdiction is in tatters. A highly dangerous square for an open trading nation.
According to the annual UBS wealth report the UK will lose 500,000 millionaires by 2028 (17% of the total) several times more than any other nation or Russia and China combined. That estimate is before Labour’s budget.
Even if this is half correct, and I can assure readers I know of many who are already off, the implications are immense. According to the left-leaning Institute of Fiscal Studies the top 1% of earners already pay 29% of all income tax revenue. Lose many of these and the choice is stark; raise tax further and increase the exodus – or do something about the reasons millionaires are leaving!
I am not going to predict what Labour will do save I believe Reeves when she implies taxes will rise by £15-20bn at least – but already taxes are at an eighty-year high and despite that the OBR still predicts long term disaster.
The situation is highly unstable. Central Banks and governments have enormous power and doubtless will fund the problem off balance sheet, just as the ECB and others do, but ultimately this is the road to ruin.
We know Labour wishes to ‘take back control’. Starmer has said so. He believes Labour ministers conduct the orchestra and they believe they, through their Great British Green Bank, through their regulators, through command and control, can dictate growth.
But they know nothing of human nature. They know not that the route to prosperity is not command but trust; trusting the massively creative instinct of the people. A people, incidentally, who have been one of the largest forces for good in the world, at home and abroad through invention, discovery, art and science.
Hardly a bean of that was generated by government. Labour puts itself front and central like some all-seeing Lord. Collectively it knows virtually nothing. If Labour ministers cared to look down past their glittering robes, they might see it is the little platoons that have made this place what it is, slowly but surely over the centuries.
Yes Labour will build on the Conservative Government’s legacy of taxing pensions, property and what they deem to be ‘wealth’, but all they do is further undermine the edifice. Does Communist China stand still as we encourage worklessness? Does India raise its minimum wage yet further? We live on past capital; intellectual, social and moral. It is being cast aside – propped up with monetary experimentation, taxation and debt. Ours will be the last generation to enjoy such privilege. Unless we reject it out of hand…
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