So We’ve Run Out of Money. What now?
The OBR has informed the Chancellor that she has run out of the £9bn headroom granted through tax-rises in the Autumn Budget. So, what are her options?
Government can only raise funds to spend in three ways - tax rises, cutting budgets, or printing money. With interest rates creeping up and a dour forecast by the Bank of England, it is unlikely that money printing will be of any use. Likewise, the tax:GDP ratio currently stands above 35.3%, above the OECD average and well beyond the peak of the Laffer Curve. That leaves one option - spending cuts.
The so-called Austerity period of 2010-2015 was nothing of the sort - overall government expenditure rose from £760bn in 2010 to £813bn in 2015. The latest ONS figures in 2022 show that expenditure stood at £1.167 trillion. The Keynesians won out, despite what Keynesians say - and look at what is the result. Taxes are too high and cannot rise further, the economy’s dire growth and rising unemployment shows as much.
Cuts must be radical and deep - this medicine will be very bitter, but unfortunately the sickness is rooted deep.Javier Milei’s radical plan to sheer 30% off state spending is bearing fruit. Public sector pensions have been exorcised - in the UK means testing the state pension and abolishing the triple lock would be a good first start. Likewise, removing the gold plating of public sector pensions would end a lot of the anxiety facing gilt markets, regardless of what Treasury-brained civil servants think of in-year expenditure.
Immense amounts are wasted in government spending. In one example, £25m has been spent on “Green Urban Growth in Somalia”, despite Somalia being in the midst of a civil war. This profligacy is endless, and requires rapid stripping back. Elon Musk, although acting with aggression and possible illegality, has planned to slash 1/3rd of US government spending. A UK DOGE, although at a smaller scale, would be welcome to trim the fat slowing down growth.
The Chancellor needs to look to radical tax cuts to balance the books and liberate capital to be productive again. Transfers from productive sectors, such as the oil and gas sector (which has an upstream headline tax rate of 78%(!)) and the finance and insurance sectors (burdened by the stamp duty shares tax, the bank levy and surcharge, and the insurance premium levy) must be rapidly curtailed. These sectors are productive in spite, not because of, high regulations and taxes.
Growth is the answer to Britain’s problems, as rightly identified by the Government - backing infrastructure investment in airports, filling potholes, deregulating the planning system are good starts. But so long as the yoke of regulation and high taxes remains - these plans will not solve the ‘we’re out of money’ problem facing the Chancellor.
