Summary
The Office for Budget Responsibility recently released a report highlighting the UK's economic challenges, including rising debt and public spending, exacerbated by crises like climate change and an ageing population. The report forecasts a severe debt increase without effective policy action, projecting public spending rising to over 60% of GDP.
I argue that this overlooks the need for increased taxes to manage inflation and societal needs. The analysis is faulty and driven by outdated neoliberal beliefs, risking austerity and increased inequality. What the OBR does is prove its own economic incompetence.
The Office for Budget Responsibility issued a report yesterday that showed their ignorance of a great many issues and, in the process, highlighted the danger of relying on people who do not understand the substance of what might happen in the real world but who would rather, instead, extrapolate financial data in ways that are utterly impossible.
What they noted was:
The past two decades have seen the UK economy hit by a succession of extraordinary shocks, in the form of a global financial crisis, a pandemic, and an energy crisis. The public finances have emerged from these shocks under strain. Deficits have averaged just under 5 per cent of GDP since the start of the century. This has caused debt to more than triple as a share of GDP to 98.1 per cent of GDP by March 2024, its highest level since the early 1960s.
As they also noted:
Public spending is at nearly 45 per cent of GDP in 2023-24 – its highest sustained level since the mid-1970s – as a result of increased spending on public services, welfare, and interest costs.
And as they added:
To reduce the deficit and arrest the rise in debt over the next five years, the previous Government's fiscal plans were based on holding real growth in public spending below that of the economy, and the tax take increasing to 37.1 per cent of GDP, which would be its highest level since the late 1940s.
All, then, is gloom and doom. So much so, in fact, that right at the outset of their report, they note that:
The analysis in this report shows that, based on policy settings in March 2024, these and other pressures would eventually put the public finances on an unsustainable path.
Over the next 50 years, public spending is projected to rise from 45 to over 60 per cent of GDP, while revenues remain at around 40 per cent of GDP (Chart 1.1).
As a result, debt would rise rapidly from the late 2030s to 274 per cent of GDP in our baseline projection.
They add, just for fun:
Indeed, debt is projected to rise further to over 300 per cent of GDP, when further shocks and pressures are taken into account.
In practice, if these pressures and shocks were to materialise as we project, then governments would need to take mitigating policy action to prevent this debt spiral from occurring.
On our baseline projection, to return debt to its pre-pandemic levels would require an average fiscal tightening of 1.5 per cent of GDP per decade over the next 50 years.
What are the shocks that they expect? They say that they are:
• an ageing population, with a falling birth rate
• climate change, including the fiscal costs of completing the transition to net zero while also coping with damage from rising temperatures and more severe weather; and
• rising geopolitical tensions, with both the previous and current UK Governments aspiring to raise defence spending to 2.5 per cent of GDP.
In other words, the costs of what is already observably happening are what is going to send us into the economic tail-spin that they predict.
They summarise their forecast in this chart:
I will admit that I have not read all the rest of the report that they have produced: time has not permitted that. But I have read enough to think that this is laughably wrong, although it will be widely believed.
In essence, what they are saying (and I think what follows is fair, although a drastic simplification, in a tone that they do not use) is:
- We will not be able to afford to tackle climate change because of the increases in government debt that it will create, as noted above.
- We will not be able to provide health care for those who need it - the cost of which is going to rise considerably.
- We really can't afford to fall out internationally, although the likelihood that we will is growing.
But what they ignore altogether is that if public spending grows to 60 per cent of GDP - as they say is likely - then it is utterly implausible that taxes will stay at 40 per cent of GDP. That simply cannot happen if inflation is to be controlled. Because they do not understand that state spending is funded by government money creation, the result is that they do not apparently appreciate that taxes will have to rise if the state commands so much of the output of the state to meet essential needs - which all of these issues will represent. Unless they do, inflation would follow, like night does day.
Instead, they assume, wholly without reason, that there is a limit to which taxes can go, whatever the circumstances. Only dogmatic belief, and not evidence, can explain this bizarre assumption. They have only to look at other times of crisis (like wartime, in the UK's most recent experience of existential threat) to realise that no such limit on tax raising exists. But they apparently have not been able to undertake that simple exercise and think that there is a ceiling on tax revenues beyond which it cannot rise. Their neoliberal beliefs blind them to reality.
Worse than this, their assumption is that the excess of government spending over tax would all be lent back to the state, fuelling ever-growing interest costs, whilst inequality would go through the roof because of the refusal to tax all the wealthy beneficiaries of this government spending largesse which would inevitably result in the accumulation of excess funds by a small number in society. It is, after all, a fact that, as the sectoral balances show (which are ignored in the report), public deficits fuel the growth in private wealth.
So, what this report claims to show is that apparently:
- the state can spend a great deal more to meet essential needs without taxing more,
- but inflation will not rise, and
- inequality will go through the roof, and
- the state will have to divert resources from essential purposes to pay those who own that state-created private wealth for the right to use it.
As a result, the OBR concludes all other state services must be cut from now on, meaning austerity is required. Even then, we might just not be able to afford to both care for the elderly and tackle climate change.
All of this is pure nonsense. There are good reasons for saying so:
- The UK population will grow: inward migration will guarantee that.
- As a result, tax revenues will grow, come what may.
- The state will tax more as it spends more - it will have no choice but do so to prevent inflation, the causes of which the OBR clearly does not understand. If state spending reaches 60% of GDP, expect taxes to be at least 55% of GDP, and as a result, debt will not accumulate as the OBR suggests. In that one observation, I have solved the whole crisis the OBR says exists.
- Wealth inequality will be tackled. It will have to be, and that is what happens in crises.
- Society will change radically in the face of the demands imposed on it: the OBR assumption, not stated but implicit in all they say, that all things will, bar those they mention, stay as they are now is absurd.
In summary, this work is a worthless summary by economically illiterate fantasists who wish to justify economic and social inaction in the face of climate change, ageing populations and other issues. And these are the people Rachel Reeves thinks should be in charge of saying whether the country is on the right track or not.
I despair.
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Last sentence: “saving” should be “saying”
Corrected
Thanks
What can be said other than the country is full of Reality Dodgers!
If money creation always has to be matched as soon as possible by money destruction or cancellation, the so-called “need to balance the books” or “black hole” metaphors how on earth can savings be possible?
Dodgers explain that reality please and explain it now and stop your dodging!
I thought I had already commented on this yesterday, but can’t find it. The organised takeaway for this was the OBR has produced a long-term fantasy, with a central forecast of a Debt/GDP ratio of 274% by 2073-4. It is a deliberate exercise in political spin, because the key Debt/GDP ratio of 274% (deliberately higher than WWII) immediately appeared on the media platforms last night, and C4 News; and little else from this piece of erroneous fluff. No responsible forecasters should touch a fantasy forecast of that duration. No responsible forecaster has the equipment, the methodology, the tools to undertake such a recklessly wanton exercise in unscientific nonsense. It is a grossly over-extended extrapolation. It is an insult to our intelligence. 2074 debt levels cannot be intelligently be tackled; it rests in the centre of a whirlpool, in the middle of a vast, angry sea of unknown unknowns. It is grotesque. The OBR should be ashamed of itself. It has been misused for political purposes. It is a disgrace.
If you struggle to see the absurdity; how well do you think a 1974 Debt/GDP ratio (an abstraction, please note) forecast for 2024 would look, or what they would say, about now? The UK had been driving the Ratio down since WWII, and by 1974 it was below 50%; and so bad was the decline of the British economy, Margaret Thatcher was in power by 1979; and used North Sea Oil revenues to drive it down even further, fund City irresponsibility, spend nothing on infrastructure, and fail to deliver secure growth or gains in productivity. Britain’s economic growth has, historically been periods of high debt; for much of the time a Debt/GDP ration of 100%+.
Much to agree with
In the 1931 economic crisis which lead to the Great Depression the Labour Leadership decided there was no alternative but to adopt what the bankers said was necessary. Cuts -even to the dole from 29s a week to 27/6. It divided them from much of the party membership.
Thirty years later my O level history book said, along with many others, they had it wrong. They did.
We seem to be going down the same path again.
I note yesterday you had 118 responses to your proposed road show. Is that a record? I think it shows the desire for a different way.
It feels a little overwhelming…
Hi Richard – if I may?
Please don’t feel overwhelmed.
You do such a lot OK and we all see that.
The way you work is always on the front foot. You decide on the issues you are interested in on the day and go for it. In a world that seems to be chaotic you impose your control on it by reflecting, researching and commenting to sufficient depth on what interests you. That also empowers you and helps you to deal with things that you find offensive and wrong.
But even when you are doing this, once the post is out there, it’s out there and then you have no control of the response which is varied and also hostile. And this Keen Tour business is just the same at this juncture.
All I’m saying is that the enthusiastic response should be noted and if anything a slow build up initiated. But if it does not happen, it does happen. There is no need to feel any pressure or any sense of looming failure or letting anyone down. The ‘Alt-Economy Thesis’ does not have at its disposal the self-interested corrupting resources that drive Neo-liberalism.
At the moment it is an idea – like one of my housing development schemes – sometimes you know, they are just not viable and that is usually a unanimous decision, but never a nice one to take in the face of demand, but necessary.
So relax and see what happens is my advice. It’s not just down to you. And it should not be. Other talents need to come into play – organising talents, marketing talents etc. I for one will not impose that on you and I thing I speak for others too.
Cheers.
Appreciated
Thanks
You are pushing at an open door, a lot of people want to hear that there is an alternative to this insanity; But. I detect that you do feel overwhelmed; and that perhaps suggests you know there is a scale and know-how you need that, without which it can all go very wrong. There are a lot of things you do very well, but here I think you need proper organisation around you to make this happen, in the way it could, or should. I can say that easier than offer solutions. I would say, sit down with your primary collaborators (and your own closest advice); and look at the options, how to deliver them; and what your combined networks may be able to produce between you. Events are a fast growing industry in themselves. There is a skill set. The same applies to crowdfunding. Do not try to reinvent the wheel in an area you know little about it. I have now exhausted my insight here, and no doubt your attention.
Without others running this I will not be able to do it
It is as simple as that
I’m not signing up for a lot of admin hassle…
There are some days when I think the only rational response to our Government’s mismanagement is to emigrate. Clearly, changing the colour in Westminster of our Single Transferable Party has done almost nothing.
Emigrate to where?
There is only one tide that is going to raise all the boats and its not the Neo-liberal economic one.
It is global warming.
Please challenge the OBR to a televised debate. I would love to watch that.
That would never happen
‘If state spending reaches 60% of GDP, expect taxes to be at least 55% of GDP”
This is the whole issue with your MMT nonsense – spend as much money as you like and then use taxation to manage inflation.
You seem unable to accept that there are credible limits to the ability to tax – in practical terms, and in what populations will accept. The tax burden is already at high levels.
As the OBR emphasized, the plans were to increase taxation to 37% of GDP, which is the highest in the last 85 years, yet you think that taxation of 55%, the level necessary to manage inflation in your MMT world, is actually a credible position?
And then you claim that the OBR don’t understand what would happen in the ‘real world’, using what happened after the war as your ‘evidence’, seemingly failing to realise that post war, at the peak, taxation was still under 40%!
You haven’t read the report fully, and you haven’t actually done any analysis of the ‘real world’, so I think you need to ‘get real’, to use your own expression – your claims about taxation is pure fantasy.
Normally I would not bother with a troll, which you very obviously are.
But let’s be clear. The OBR wrote this report. They say government spending will need to be 60% to meet need. That’s them, not me. But they say tax must stay at 40%. Them, not me.
Right now, tax roughly equals government spend. A bit less. That’s good. It delivers new money supply.
But they say that even though market supplied goods will shrink by a third the money available to buy them will be constant. The obvious consequence would be a deeply inflationary environment.
So, taxes have to rise. The world the OBR describes requires it. MMT simply explains it.
Argue with the OBR about government spending 60% of gdp, not me (although I think it possible). Instead tell me why you want a hyper inflationary environment as a consequence? If you can’t, accept you’re wrong. You won’t be able to do so.
It’s clear that you haven’t read the OBR report. And if you have skimmed it, you haven’t understood it. What the report describes is a scenario that would occur WITHOUT CORRECTIVE POLICY ACTION.
They are highlighting the massive chances to government expenditure needed to cope with foreseeable events.
You’re the one that is telling us that none of this is necessary as we can simply print money and then increase taxes to mitigate inflation. But all the evidence is that this is a lie.
You tell us that taxes will rise to 55% of GDP and that ‘solves the problem’. Taxes at that level are entirely unrealistic, based on all the evidence we have, including after the war.
Do you have any evidence for taxes above 40% of GDP being imposed on a population in the past, let along 45% or 50% or the 55% you claim would solve the problem?
And yet it’s apparently other people that are economically illiterate and don’t live in the real world.
I have read a lot if the report
They think ageing and climate change unavoidable
Their corrective action is cutting everything else the state does, heavily
That is not going to happen
You and they are the fools in the room for even thinking it might
My analysis stands
Theirs is crass
You have not got one
“What the report describes is a scenario”.
Scenarios are not science; they are not even forecasts. Scenarios are what you create …….. for fiction. Hollywood is full of scenarios. And the OBR’s comical extrapolation is straight fiction. It is a calculated Hammer Horror; a low budget drama intended only to terrify the voter. And it was rushed round the media outlets to do just that. It was virtually the only extract published in the media. That was not an accident.
I have read the OBR report, and I have written two comments on its crude, amateur flaws on two different threads. The OBR should be embarrassed to produce this rubbish; a fifty year financial speculation! Serious professionals do not undertake exercises they have neither the science nor the methods to execute with basic competence. You have heard of science? Well science, at its best stands up for fifty years. This nonsense isn’t science, and no real professional in banking, economics or accounting is equipped to make a meaningful statement about the nature of the world fifty years hence; because their limited techniques aren’t science and are not deigned for such a long-range challenge. If you knew what you were talking about, you wouldn’t need your silly pseudonym to cover you ignorance and embarrassment, and you wouldn’t be prepared to make such a complete fool of yourself.
Unless, of course, you actually work for the OBR ………..Given what it has just allowed itself to publish; and your foolish interjection here, I wouldn’t be surprised.
@ Nelly The Elephant When are you going to face reality and tell us why licenced bank created money from thin air hasn’t been creating house price inflation for over five decades when it clearly has. Your comment is two-faced unless you do this! If you don’t know that licenced banks create money from thin air then you are hardly the one to be commenting on monetary system matters!
[…] different economic backgrounds? My suggestion is that these various suggestions, and those that came recently from the Office for Budget Responsibility on the likely growth in government spending over decades to come, imply that we are approaching a […]