The UK economy need not be stuck in a rut. It's Rachel Reeves' choice that it is. If only she demanded lower interest rates from the Bank of England and let the government spend to transform public services, we could be in a great place. She won't, though, making her the impediment to progress.
This is the audio version:
This is the transcript:
Where is the UK economy? If you were to listen to most commentators, you would say it is in a mess. And, to some degree, I have to agree with them. As it stands, Rachel Reeves has put us in a mess. Deep into a mess. But we need to stand back a little bit and decide what does that mean? What are the causes? What are the prospects, and how can things change? Those are the themes that this video is all about.
So, where are we in reality, standing back from the immediate crisis that all the commentators are talking about, because interest rates in the UK appear to be rising? If we do that standing back, we will notice that Rachel Reeve's plan for growth is failing. And this is the overarching concern that economic commentators have. And they're right. The plan for growth is failing, but let me explain why.
Firstly, it's failing because the private sector is not trying to grow the UK economy. More than that, it has no idea how to grow the UK economy.
The private sector in the UK does not focus its attention on creating new products and services. It focuses its attention on how to extract value from existing products and services. In other words, how to add finance, or how to increase prices, but not how to add value. And the adding of finance, and the extraction of additional value by, for example, renting products that were previously sold is called financial engineering. And that's the only thing that the largest companies in the UK are now any good at. So, it's hopeless to think that they are going to deliver growth.
They're also not going to deliver growth because, frankly, there is no new technology for them to invest in. And anyway, they aren't investing full stop. Despite all the incentives that they have been given, which they demanded from the previous Tory government, and which have been continued by this Labour government, they are not investing even though, for example, they have been given 100 per cent tax relief on every pound they spend on investment in a year, which they said would liberate funds for this purpose, and which haven't.
They also have no clue why they want to invest in any case because there is no additional demand in the UK from people for services because our incomes are flat. In other words, the private sector is in the doldrums, and nothing is going to change it. A bunch of clueless people who claim to be entrepreneurs but clearly aren't, are in charge of business and they're not going to deliver growth for us.
Nor, unfortunately, is the public sector going to deliver growth for us. And that's because Rachel Reeves is already effectively set on austerity.
Yes, I know she has increased spending in the NHS a bit, but only a bit, and not enough to even meet additional demand from people who are obviously more sick. They must be because they're certainly turning up at doctors more often.
Look at other parts of the UK public sector and almost nothing to deliver growth is happening. Education is flatlining. Other parts of the public sector are still in deep trouble with no indication as to where resources will come from to actually make them effective or to meet public demand. We really are running things very badly because of a lack of money. Money which would transform those services and of course simultaneously create demand in the economy to deliver growth, but Rachel Reeves is not going to supply that.
So what else could might deliver growth? Exports could, but I'm afraid to say that despite her mad flight to China, Rachel Reeves really should not be looking there for growth. Trump is going to be in the White House. He is going to undertake trade war in some way or other. That is what he has promised to the people of the USA. He has said he will impose tariffs. If he doesn't, and if he doesn't start trade war as a result, he will fail on his first promise to the US electorate. So, he is going to unleash that trade war and he's probably also going to unleash the mayhem of trying to deport millions of people from the US and so much more. The US is going to suffer inflation and possibly recession as a consequence. We are not going to be exporting more from the UK into a world facing such uncertainty.
And last of all, with regard to this overview of the UK economy and its prospects, we have interest rates that are far too high. We know that the Bank of England has set rates which are now out of line with what is happening in Europe. We are way higher in terms of cost of interest than our European partners are facing, and it seems to have no intention of changing our rates.
Far from that. It is, in fact, reinforcing the whole high interest rate policy by undertaking quantitative tightening. The consequence is we are facing a government funding crisis because the base cost of interest set by the Bank of England is now higher than the combination of inflation plus our growth rate, therefore meaning that if Rachel Reeves is determined that debt should fall, the only way she can achieve that is by cutting government spending still further given that interest is going to take a larger part of the total budget. The result is that we are in a pickle, as my father would have once said, 60-plus years ago. That was his favourite term for a mess, and I think it's pretty appropriate now.
At this point, you might say the only choice she has left to her is austerity.
She can't change her fiscal rule, she will say.
She can't tax people more because of electoral promises.
Therefore, the only option that we have is austerity.
I disagree. Keir Starmer could, of course, sack Rachel Reeves. It is entirely possible that he might. In fact, I think it's highly likely that he will, but I don't think that's going to happen yet, because he would have egg on his face if he did so, because he's backed her too publicly. However, in time, I think she will go, and with her will go her fiscal rule because that is always what happens when we change Chancellors.
So, there is a real chance of reform at some time we might face austerity, but it might be short-lived, because another Labour Chancellor might change the rules.
Another Labour Chancellor might also, of course, tell the Bank of England to cut interest rates. If they did, they'd be very wise. It's absolutely essential to the well-being of this country that that happens. It's absolutely essential to the well-being of this Labour government that that happens. And it can happen because simultaneously, the government could tell the Bank of England to stop doing quantitative tightening, which is the sale of £100 billion worth of bonds each year out of the stock of bonds the Bank of England bought during the 2008 financial crisis and the 2020 Covid crisis back to the financial markets, with the deliberate intention of crushing growth in the UK economy.
You could not make something up quite as absurd as this. When Rachel Reeves is begging for growth, the Bank of England is doing everything it can to destroy it, and a wise Chancellor, unlike the one we have, will tell the Bank of England to stop doing that. And as a consequence, interest rates would fall.
At the same time, we could undertake real reforms. Those real reforms would include increasing the taxation of the wealthy. The wealthy are simply too wealthy for the well-being of the UK economy.
I made a video recently in which I explained that if you have too many wealthy people who do not spend in a productive fashion because they're so obsessed about remaining wealthy, you will actually shrink the size of your economy because the money that they could have spent is not being used productively and therefore growth falls. I'm certain that is happening.
We could put the money that is currently used by those wealthy people back into use and in circulation in the economy simply by taxing them more, by redistributing income and wealth. And a wise Chancellor would be doing that because that is what the UK economy requires.
A whole range of options to achieve this goal are available inside the Taxing Wealth Report 2024, which I wrote and which you can Google and find on the web - 126,000 words for and 30 recommendations as to how we could deliver against this goal, not all of which would ever need to be delivered at once, I make clear.
And we could, as I've said often and I will say again, change the way in which pensions and ISAs are given tax relief in the UK so that money saved with a tax subsidy has to be used for a social purpose, meaning that this money would be available to create the investment in social infrastructure, whether that be housing, or in the green economy, or in transport, or in education, or in health, to deliver what the people of the UK need. Using funds saved by people in this UK, for the benefit of the people in the UK, with a tax relief attached. That is entirely possible.
To pretend, therefore, that we are stuck, which is what most commentators claim, having analysed the current UK situation, is just wrong. We have every opportunity for change, and every opportunity for growth, and every opportunity for a better future.
But only if we have a Chancellor who is willing to give up her stupid fiscal rules, which is what Rachel Reeves has, as did all her predecessors since Gordon Brown, around the turn of the century.
And, if we have a Chancellor who is willing to understand that the state has the power to change things, and in particular, the state has the power to deliver growth when no one else in the economy will do so. That's what Lord Keynes taught us. He was right. We seem to have forgotten the lesson that he provided in the 1930s and afterwards.
Now, we need to go back to being true Keynesians. We need to have the state swing into action to give the pump-priming money that is necessary to ensure that our economy can deliver for everyone. It could. I think it will eventually, but I do know that we will need a change in our political thinking to achieve that goal. I just long for the day when that happens.
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To me, it’s as if the seniorage-like side of money creation is being completely ignored by the government – they have at their finger tips a sovereign money creating power that is not credit or interest bearing. This power was used in 2008 to benefit a private sector banking crisis. They can also tax to control inflation – tax which really called be placed on wealth.
We have a crisis in public services – from roads to the NHS which is not treated with the same amount of gusto and priority as the privately induced 2008 crisis.
Nothing to me at least tells you more about how shallow our democracy really is when you consider this. And yet, the Establishments is getting away with it in plain sight and immigrants and Muslims (to name but a few) are getting it in the neck instead.
This country is really ill; it’s polity has stopped functioning and is instead taking us down a really dark road.
What about a fiscal rule that everyone in the UK goes to a warm bed at night with a full stomach?
That’s a good one.
“pensions and ISAs are given tax relief in the UK so that money saved with a tax subsidy has to be used for a social purpose”.
Savers really do not trust the State with their money other than Gilts where there the return profile is set out in stone. Are you suggesting therefore ISA and Pension savers only get the tax breaks if they 100% own gilts?
Why not read what I wrote in the Taxing Wealth Report 2024? See chapter 14.
Again, spot on with your analysis and prescription.
I know this will never happen, but in similar vein it might be very helpful to Reeves (I doubt Starmer would understand what I’m going to quote next, hence no mention of him), and it might certainly cause some of Reeves’s Treasury officials to THINK HARD about what they believe, and admit their ideological roots are at fault here.
That said, the first and last lines of the quotation below illustrates why that will never happen – not in the UK, not in the US or perhaps anywhere. Which, in my opinion, is why we’re seeing the dramatic turn to right wing, populist, autocracy/totalitarianism: better that and the suffering it will bring than for any neoliberal supporter (and particularly economist/academic) to admit their arguments and beliefs have run their course because they were always fundamentally wrong.
Anyway, here goes:
‘Just as Leninism proved impossible to reform without contradicting the principles on which it was built, it is likewise in the nature of neoliberalism as a tautological doctrine that it is hard to recant. Accept the realities of radical uncertainty and the micro-foundations of neo-classical economics fall apart, and a practical and problem-solving empiricism must roar back into view as a necessary approach, along with the need for “directionality” in government…In neoliberalism as in Leninism, the misapplied language of science demonstrably stops government from applying the scientific method.’ (note: emphasis applied to method in the original) ‘and the recalibration of theory based on evidence. We can consequently observe in both cases how the misappropriated language of science forestalled a substantial critique because the political stakes were almost immediately too high. The basic orthodoxy could simply not survive it.’ (Innes, A, 2023: 171-172 . “Late Soviet Britain: Why Materialist Utopias Fail”)
Thanks
And well-quoted
Thank you. One of the great benefits ( and pleasures) of visiting this site, is the quality and variety of comments.
It’s a 14 year dynamic – and the body politic wont face up to the dire state of things. Austerity and bleeding the state of its assets and the people of their income cannot continue for ever.
Reeves has the misfortune to take over when the system’s internal contradictions are coming to a head. Even the IFS issued a coded warning before the election that there was a conspiracy of silence on both sides – denying the scale of the crisis.
Whether she is sacked or not – she/they will have to break out of their self imposed rules – as Richard says , the public sector can be the engine of ‘growth’ or revival – and it just has to be – but its difficult to imagine how on on earth Starmer’s Labour would be able to execute such a volte face.
‘Anything we can actually do we can afford’ would be a very telling Keynesian slogan – but you can’t see it coming from anyone in the Starmer project.
‘Anything we can actually do we can afford’ sadly requires a “can do” attitude sadly missing in the UK with the exception of this blog and a few other MMT inspired ones. “Why can’t we?” needs to be asked at every opportunity!
Not wishing in any way to defend Rachel Reeves, but while what she has done and not done have done little if anything to address the dire state of our economy, and may have made things worse, she is far from solely to blame. Most of all her disastrous pre-election pledge not to reverse Hunt’s politically motivated tax cuts, made worse by her obstinate post -election decision not to ditch these pledges in light of the “black hole”, has greatly reduced her freedom of movement.
I fear that if and when she moves on she will be replaced by someone with a similar disposition. Starmer is committed to these policies and does not appear to have the imagination to see where they are leading. In the meantime any increase in investment in infrastructure and housing may well fail to provide the stimulus required through bottlenecks in the Labour market and the failure of a de-industrialised economy to benefit from the opportunities that such investment might be expected to provide.
Hello,
I was wondering how did we as a nation go from where all the NHS buildings was owned by the state to where we pay rent to property companies for the same buildings we once owned.The reason I am asking this is because you always hear how much we spend on health and how it compares to other countries.
Considering the state of health service it makes you think surely all those rents we pay would be far better spent on recruiting more doctors,nurses and other health workers. Maybe someone could expose this scandal and why we need a proper NHS and not as now where money drained away.
I’m guessing you know the how and it’s a rhetorical question!
Derek. If you have even a slight knowledge of politics and economics you could read the book I quote from in my comment, above, by Abby Innes. That book will take you through what started with Thatcher in 1979 – the advent of neoliberalism – and became, in public policy terms, privatisation, contracting out, the agencification of government (i.e. the setting up of arms-length agencies to carry out government activities – e.g. the DVLA), and so on. It also explains why under the dogmatic and utterly false assumptions of “government by the market”, we end up with predatory, rent seeking activity as almost endemic, paying more for public services than we ever while they are, almost always, no better, and often worse, than we had under the previous social democratic approach to politics and economics (or as we would often refer to on Richard’s blog as political economy), and very much more. Hope that’s helpful.
Thanks, Ivan.
Hello I would like to see an actual breakdown of how much money the NHS spends on rents for the hospital buildings. This would make it clear the scandal of privatization,money I believe should be spent on recruiting more medical staff. Should we waste money on lining the pockets of property companies etc.
I think you would need to make a Freedom of Information request to get that data.
Hang on, if the NHS does not own all those buildings with RAAC or falling down for othr reasons, why aren’t the landlords carrying out the repairs?
Oh, I know. When ‘we’ sold off the buildings we sold the right to rent but not the obligation to repair? Very sensible.
Hello,
In your comment you said to get the information concerning rents for NHS buildings would require a freedom of information request. I say do it and bring down the whole edifice of the disaster of privatization,expose the corrupt gang that is destroying the NHS.
The consequences of the Bank of England’s machinations are already quite serious since even Left wing outlets are accepting the narrative that austerity is now necessary
https://m.youtube.com/watch?v=-AOV80D__Ys
And note how towards the end of that video how they start questioning whether we can afford the state pension and adult social care. I’m sadly seeing more and more younger people discussing this – egged on by some truly resentful Right wing commentators like Louise Perry – because they don’t believe they will get a state pension and thus adopt a zero sum attitude. You have to wonder about their relationship with their own parents and grandparents.
Politely, if you think The New Statesman is left of centre these days you are in need of a new political compass. It is centre right, and wholly neoliberal.
Thanks
I hadn’t even considered that it might have shifted. Andrew Marr does come across as being solely concerned with Labour staying in office.
But Labour is right of centre now
https://www.theguardian.com/politics/2025/jan/13/no-10-backs-rachel-reeves-to-remain-in-post-for-rest-of-parliament
Same chancellor.
Same policies.
“Ruthless cuts”
Darren Jones agrees.
“Till the next election”
Starmer has reversed the canoe up the creek, jammed it stern first into the mud and reeds, and he, Darren & Rachel are just going to keep paddling and churning up the mud till Fa***e takes over in 2029.
Please, someone in the Cabinet, TELL HIM!
WE ARE DYING OUT HERE AND HE’S (FORENSICALLY) PADDLING THE WRONG CANOE UP THE WRONG CREEK IN THE WRONG DIRECTION USING THE WRONG PADDLE AND THE WRONG CREW.