Over the weekend, the FT noted:
Rachel Reeves has vowed to act if her fiscal plans are blown off course by turmoil in the gilt market, as she announced a deal with China intended to boost Britain's stagnating economy.
The UK chancellor, speaking in Beijing on Saturday, insisted she would meet her fiscal rules that have come under pressure after UK 10-year borrowing costs last week rose to the highest level since the global financial crisis.
This is nonsense, of course. Reeves cannot meet her fiscal rule. There are numerous reasons.
The economy is flatlining. Despite being given every incentive that they have demanded, the private sector is not delivering growth in this country. They are out of ideas. The full expensing of their capital expenditure has not incentivised them to spend more. There is no technological innovation to encourage them to do so. There is no demand in the economy to make them think it is worthwhile investing. There is, then, no prospect of any economic change or growth coming from private sector activity. Reeves' ridiculous imposition of an additional employers' national insurance charge only made that prospect of growth worse, particularly amongst smaller businesses.
Second, Reeves is doing nothing for the public sector economy. The NHS might have a little more money, but demand is outstripping that additional resource. The defence sector might also have additional money, but it's a notoriously hopeless as a driver of economic growth. Elsewhere, we are already suffering state sector stagnation. Nothing that she is doing there can drive growth. She is just not spending enough to make any difference.
Third, desperate flights to China change nothing, particularly when Trump will, inevitably, be starting trade wars very soon if he is to have any credibility with his electorate soon after coming into office. I think we can forget expecting to see exports as a source of growth in that case.
Fourth, interest rates are too high in the UK. Add together inflation and growth, and the combination is still somewhat less than the interest rate, meaning that if Reeves is crazy enough to continue with her fiscal rule (and she might well be), she cannot balance her budget because her cost increases will rise faster than currently planned taxes, meaning debt will increase contrary to her fiscal rule, which she says is essential (even though it isn't) meaning she must either increase taxes, particularly on the wealthy (which she says she will not do) or impose austerity (which is very likely). which will only make things worse and drive the UK economy into a downward spiral.
Commentators have a choice at this point. They can agree that either Reeves is right about the need for a fiscal rule and so must stick to it, or they can suggest she's wrong on this issue but she will stick to it anyway. Many go no further. This was, disappointingly, where Gary Stevenson got to in a video yesterday. His conclusion was that the markets will beat Rachel Reeves and that austerity is inevitable as she will not tax the rich.
I do not accept this. There are many more options.
First, Starmer might topple Reeves.
Second, Labour ministers might topple Reeves.
In either case, an alternative policy could be created, hopefully with no fiscal rule at all.
Third, as I discussed here last week, Reeves could tell the Bank of England to end quantitative tightening, which is why our interest rates are so high.
Fourth, she could force the Bank to reduce rates.
Fifth, she could spend more to deliver growth, but as importantly, to meet the real demand that exists in the economy.
Sixth, she could read the Taxing Wealth Report and take her pick of necessary tax reforms.
Seventh, she could reform ISA and pension tax reforms to fund real state-driven investment to meet needs (see chapter 14 of the Taxing Wealth Report)
Eighth, she could redistribute income and wealth to increase multipliers.
In summary, to pretend the only options are to increase taxes or have austerity is completely wrong. There are choices. But will Rachel Reeves choose to avail herself of them? That is a completely different question, to which the answer is she would if she wants a high-level career for much longer.
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I quite agree.
“This was, disappointingly, where Gary Stevenson got to in a video yesterday. His conclusion was that the markets will beat Rachel Reeves and that austerity is inevitable as she will not tax the rich.”
And he is almost certainly right. That’s not because she couldn’t win. It’s because she chooses not to win, to let the markets win. She doesn’t have to. She could instruct the BoE to buy bonds in unlimited quantity and push interest rates down, as Japan has successfully done for many years. And she could tax the rich. But she chooses not to.
But to say she has limited options is wrong – that is what I was saying.
Absolutely. She has a myriad of options, as you said, and as I have just been discussing with and old friend who is a Labour supporter. She should use some of her options. Please.
Dear Richard, I watched Gary video as well and had similar thoughts. In a comment strongly invited Gary to get in some intensive contact with you that might up his knowledge and ideas even more!
The agreement with China Reeves wants to achieve is being spun in the UK as being for the British economy; but what Reeves means by the ‘British economy’ has a special meaning. Reeves means, for the sake of the City of London. The Hong Kong Free Post reported the Reeves as saying, “London was a ‘natural home’ for Chinese finance and your clients raising capital, and a launchpad for Chinese firms seeking to build a global footprint.” (11th January). You may be confident that little or none of this benefit, save at the slimmest margin of activity, will ever be outside London. The FT ran a headline, “Rachel Reeves seeks to revive City of London links with China”. Reeves, Labour, Conservatives all equate the economy with the City.
The tail is wagging the dog. It is a very bad idea for a medium sized irrelevance to rely on a prominent position in international financial markets for its economic well-being. The problematic non-problem turbulence in London’s financial market is an illustration of the weakness of having so many of your eggs in that basket. Britain is not big enough to be a ‘player’ in world markets; but tries to construct a monetary policy that is beyond it; in a forlorn effort to protect the City. We do not focus on real underlying problems; but leave ourselves to over exposure to financial risk, to excessive imports, to a failure to export, and a large balance of payments deficit. We try to have a financial profile like the US (with a GDP 12 times the size, and is the World Reserve Currency).
The US has a Debt/GDP ratio around 125%. Japan, around 250%, the UK 99%. Britain’s position is the weakest. It is Britain that is both obsessed to the point of paranoia about the Debt/GDP ratio, chasing its impossible fiscal rules, and as the willing prisoner of world financial: fiscal rules designed to support, not the British people, or the whole economy, but the City of London. The US is the world’s leading economy; Japan does not allow its economy and its economic policies to be determined by world markets, or world markets to determine its borrowing.
Britain’s economic model is unsustainable; a point confirmed by the insanity of Brexit. The world knows it. Only Britain does not.
It was disappointing to see Gary Stevenson not even consider the possibility of allowing government debt to rise. From 1915 until the early ‘60s, debt as a %age of GDP was significantly higher than it is now, and plenty of good things happened in the ‘50s and ‘60s.
https://www.statista.com/statistics/282841/debt-as-gdp-uk/
Agreed
I studied science not economics but I find your prescriptions compelling.
Might they be more likely to be implemented if they were written as if they were likely to be put on the desk of the chancellor, or other minister, by a senior civil servant or cabinet colleague without the need for them to be redrafted?
I read that, when presiding at cabinet meetings, Harold Wilson insisted that everyone was addressed by their job title: the Chancellor, the Education Secretary, etc.
We cannot know the forces that play on each of them. Perhaps we can more effectively support them in making good decisions.
They could be written by ChatGPT. Starmer would like that.
Spotted this today in The Canary – https://www.thecanary.co/uk/analysis/2025/01/12/bond-markets/
Now I won’t comment on it because it’s about bonds, and I still find them confusing. I have no wisdom on the matter to offer, others here DO have the knowledge and experience.
BUT I find it heartening that as I suggested earlier, Richard Lowe’s anti-QE (& pro gold!) Bill is promoting discussion about money and where it comes from.
I’m also fascinated to see that Mr Lowe is complaining about big state “regulation” stifling growth, perhaps unaware of his party’s plans for MORE regulation of “transport & utilities” as laid out on their website policy document – https://assets.nationbuilder.com/reformuk/pages/253/attachments/original/1718625371/Reform_UK_Our_Contract_with_You.pdf?1718625371 page 17
“Tighter regulation and New Ownership model”.
There’s also some more “money” stuff of interest to MMT enthusiasts on page 23 – funding “Stop bank interest on QE reserves” (claiming savings of £35 billion).
Once again, discussion of MONEY is on the agenda already. We can use this (on blogs, and on omnibuses!). And on BoE interest, Reform appear to agree with Richard.
A worry?
Or an opportunity?
For the avoidance of doubt, I personally am of the private opinion that Reform & Fa***e and his gang of gold-promoting opportunists are dangerous demagogues, but their chaotic mish-mash of bigoted rabble-rousing that they call policies, has some interesting intersections with MMT, which we should not hesitate to exploit, in order to discuss MONEY & WHERE IT COMES FROM. I am mindful of Stephanie Kelton’s glee whenever people attack her ideas, because she sees it as the stage just before the one where she wins.
Out of curiosity , I checked the Reform website last year just before the local government elections, and was astonished to see the policy of scrapping interest on the BoE holdings of QE money that Sunak had given the banks to tide them over COVID. What was even more astonishing was that as soon as the crisis was over, Sunak continued the process, paying the banks £40bn a year interest on money the government had created and was no longer needed.
If any proof is required as to who the primary beneficiaries are of our compromised financial system, the clear evidence is there.
Reform and Farrage support a neoliberal world but realise that neoliberal politics won’t deliver them it. They are looking for alternative methods and models to achieve it. He talks about various problems of “neoliberalism” and a significant number of left leaning voters are sympathetic to his message. However, Farage is not offering a different direction. He aims for a hyper neoliberal world. He appears to be anti-neoliberal and is willing to use unliberal methods which are at odds with us living in a democratic society to get him there. For him the ends (neoliberal) justify the means (mmt).
All Britain’s political parties and mainstream media are the problem not the solution for the very simple reason they don’t understand the implications of the following explanation made in interview by Ben Bernanke chairman of the United States Federal Reserve in 2009 following the Great Financial Crash but applicable to any country with a sovereign currency:-
https://www.youtube.com/watch?v=hiCs_YHlKSI
Effectively we live in a “daft as a brush” world since most other countries also fail to understand how their sovereign currency is created. It’s as though the world is being run by a primate species like chimpanzees!
Ms Reeves wants economic growth, but has raised taxes which in turn do not look like promoting growth.
However the Bank of England wants to keep interest rates high and suck money out of the economy.
Currently, indecision on the part of Ms Reeves on what to do suggests the likely outcome is a steep recession made worse by the Bank of England’s policy.
Are Labour going to wake up to this? Appears not.
I have one suggestion as an alternative, and that’s for the Government to leverage peer-to-peer lending, and as such, money the general public has to hand rather than be left to the whims of the banks, by setting up their own system for doing so.
I think taking this approach would solve a fair number of problems- firstly by taking control away from foreign banks and other uninterested parties, and also re-activate money sat in the market not doing anything, as for many the idea of lending money to do something specific such as building a hospital in their local area is more compelling than just leaving money in a fund that might grow sometime in the future (as most investment accounts and NS&I). There have been examples of councils successfully using existing commercial P2P lending platforms, and getting to borrow at relatively low rates, so there is precedent for this working.
I’ve set up a Government petition for doing so, which can be signed here: https://petition.parliament.uk/petitions/708932/sponsors/new?token=yBFkLnSpstgdvvQaoDzt
It’s in pre-moderation currently, but the text of the petition is:
“Launch a crowdlending service for Government borrowing
Produce a service (either a unique one or an extension of NS&I) where people can lend money to Government on a per-project basis, in the vein of Abundance or CrowdProperty. Users- individual people or businesses- would be able to support the public investment they want to see and receive a return
The Government needs to borrow to invest. However, that leaves it at the mercy of private investors who charge excessive interest rates or as with PFI, include unreasonable conditions on the loan. Borrowing more directly from the general public would allow lower interest rates, fewer conditions and would also return money back into the local economy, rather than disappearing it abroad. This system should be the first port of call for borrowing before going to banks, investors etc”
This isn’t going to solve absolutely everything- I doubt the size of the entire P2P market is big enough to cover all the borrowing the Government needs to do, and it also has to get over the hurdle of the current Labour Government’s ideological aversion to actually doing anything at all. I do think, however, it will go some way to kicking this stalemate away.
I think there is a rile for peer to peer lending, but it is very hard to manage.
The UK is an unfortunate country where widespread economic ignorance has resulted in most inhabitants, especially its politicians, failing to understand a very simple fact in regard to the country’s use of money namely that a government deficit is an equilibrium position.
“Some knowledge of national accounting helps to solve this dilemma because, as long as the private sector desires to have a net accumulation of bills, there is no need to retire all of them through taxation in order to maintain their value; a government deficit is an equilibrium position (Godley and Lavoie 2007). Private economic agents desired to hold bills for other purposes than the payment of tax liabilities, namely daily expenses, private debt settlements, and precautionary savings.”
Page 5:-
https://www.levyinstitute.org/pubs/wp_788.pdf
Godley, W. and Lavoie, M. (2007) Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth, New York: Palgrave Macmillan.
Much agree re Gary Stevenson.
He has mentioned that he has suffered with his mental health – it seems to me that he is still a tortured soul and not really in a good place. The responsibility of endeavouring to give hope to his followers is weighing very heavily.
He’s written a book. It seems very odd that he seems singularly to have failed to read one – ‘The Deficit Myth’…
I have a son studying South East Asian studies at one of the Russel group universities.
From what he has learnt from his studies, such is the difference in thinking between the Chinese and the U.S. influenced UK that he wonders if Reeves has really understood anything she has discussed with them.
The Chinese have their own problems as well as those in dealing with the West and the West’s propensity to commit economic suicide in pursuit of short term profits. Something the Chinese have also suffered as well as noted.
What did Reeves come back with – that’s what I want to know?
And how much of it could have been done here with direct UK government investment instead of inward investment that will just generate fat fees for the ‘ShCity’?
£600m of investment. One 300,000 of total U.K. capital stock.
The Times is leading with an article about how over reliant the UK is becoming on China to provide components for wind turbines and how it is a national security risk. Apparently they are much cheaper than other sources. So MI6 is definitely at odds with a policy of getting closer ties with China.
Why oh why can’t the UK ever develop its own industrial base. Or even source from a friendly country such as Denmark.
Rachel Reeves will not know.
The Isle of Wight is a wonderful history lesson of how to destroy British inventiveness and growth by government inaction. I’ve lived near the island for a fair bit of my younger life so was familiar with the ups and downs of the site near Cowes.
There used to be a thriving Hovercraft industry there, and of course, Wind Turbine manufacturing has had its ups and downs on the island over the years – especially when government refused to intervene.
https://www.bbc.co.uk/news/uk-england-hampshire-31145066
http://news.bbc.co.uk/1/hi/england/8184552.stm
Recently, action by GOVERNMENT seems to have saved some jobs there:
https://www.gov.uk/government/news/agreement-in-principle-saves-renewables-jobs-on-isle-of-wight
There was also aircraft manufacture at Bembridge as I recall.
Good analysis as ever. You don’t mention rejoining the single market or some sort of Norway/EFTA arrangement. Is that because you don’t think it politically viable in the short term (fair enough) or you don’t think it would make a difference anyway?
I don’t see it happening in the short term.
I too watched Gary’s video yesterday and, although his scratching does irritate me, waited and waited in expectation of him saying “so what” to an increase in the borrowing to GDP ratio. It didn’t manifest and I’m beginning to think Gary doesn’t know how money is created either
He does not understand money.
I have to guess he’s an economist…
Surely Reeves must see the points you raise and have access to similar analysis as well. Most of the points you have suggested in conclusion and on the tax report seem feasible to implement and politically ‘manageable’ (esp given the majority Labour have). Even if Labour don’t agree fully with your analysis, it amazes me that each time their response appears to be wholly wrong or at best insufficient to make a real difference. It seems to me that they either haven’t got a grasp of what’s needed or are simply out of their depth.
Well, it’s either guillotines, Robin Hood, or a new national hobby:
https://en.wikipedia.org/wiki/Willie_Sutton#%22Sutton's_law%22
Also a good dose of antitrust.
Simpleton here. I know, little to nothing, how any of this works and it’s nice to see the efforts, that you have been putting into publishing this information.
At the moment, I can’t help but feel that, no matter who held power (be it Tories, LibDems, Labour) that they aren’t the ones running the country. I don’t believe any of them had a plan to begin with and if they did? They certainly didn’t think about how they would execute it effectively.
Just a prime example was the rise in N.I. contributions and then a quick mention, of further PFI for the NHS by all round ‘tool’ Wes Streeting (thanks Wes, the NHS won’t be a better place for your efforts I’m sure).
I might be a simpleton, but that looks like a shakedown by the unaccountable private sector to be honest.
Then there’s Reform… Where to even begin? Should I bother? When I think of Nigel Farage? The word ‘Grifter’ springs to mind.
I’m not a rich man by any stretch of the imagination, but I’m heavily considering snubbing the country that has been my home for my entire life. We seem to have lost our way and the people in power, seem to have done everything they could to fast track it.